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Tuesday, 24 October 2017

The deals: 1994 to present

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1994: Republic of South Africa’s US$750m bond – the post-apartheid international debut

It was “our most important financing this year – both in investment banking terms and in world terms”, a banker at one bookrunner told IFR when the deal was completed.

Nelson Mandela had been elected President of South Africa in April and before the year was out the sovereign had returned to international debt markets. The US$500m five-year bond issue, lead-managed by SBC and Goldman Sachs, was upsized by 50% and priced at 193bp over US Treasuries.

Investors were courted by Chris Liebenberg, minister of finance, and central bank governor Chris Stals, among others, during the extensive roadshows. The US – where investors had not been able to buy South African paper for nearly a decade – took more than 50% of the bonds.

“We had to go very, very deeply with investors in order to get … what the borrower was trying to achieve – to be accepted into the international capital markets as a blue-chip name, at a fair price,” said Stephen West of SBC at the time.

Not all were won over by the romance of Mandela bonds, though. “There is still a threat of civil war, the government hasn’t been tested in a crisis, and as far as I can see the economy can only get weaker on a five-year view,” said one new issues trader after the pricing.

Against that background, Liebenberg told IFR that he found it “particularly pleasing” that pricing and early trading had placed the split-rated RSA firmly in the investment-grade category of borrower.

1995: DuPont’s US$8.8bn stock repurchase – corporate equity derivatives save billions

The deal came about because, in 1981, Seagram had unwittingly become the major shareholder in DuPont. The distiller’s attempt to diversify by purchasing an above 30% stake in oil and gas firm Conoco was instead met by DuPont being drafted in as a white knight, with Seagram ending up tendering its own shares in exchange for 24.3% of DuPont.

By 1995, Seagram was more excited by the prospect of investing in movies and DuPont was wondering what to do with its cash pile.

The Goldman Sachs-arranged stock unwind was not only the largest deal of its kind to that point in history, it also saved both DuPont and Seagram millions of dollars through structuring to minimise tax. Senior members of the House Ways and Means Committee moved within weeks to close the loophole, and the deal became a case study for aspiring accountants.

The trick was in DuPont providing warrants covering the same 156m shares it bought from Seagram. By maintaining exposure to the same number of shares (despite strike prices almost certain never to be triggered), Seagram replaced a heavily taxed gain with a lightly taxed dividend – saving nearly US$1.5bn. Seagram was not greedy, so shared some of the spoils with DuPont by selling it the stock at US$56, which looked all the more generous when DuPont sold some shares as part-financing at a lofty US$65.50.

1995: Frankfurter Hypothekenbank Centralboden’s DM500m due 1999 transaction – first jumbo Pfandbriefe

What became the first jumbo Pfandbriefe – Frankfurter Hypothekenbank Centralboden’s DM500m 5.875% transaction issued in 1995 and due June 1 1999 – wasn’t really anything of the sort. At least not to begin with.

As IFR admitted in its 30-year anniversary report in 2004, the magazine did not record that very first issue. The deal surfaced very discreetly and was sole lead managed by the borrower.

Being less than DM1bn and without committed market-makers (beyond the issuer), it did not meet the criteria for a jumbo covered bond that were officially defined in March 1996. But that soon changed thanks to a tap that doubled its size and the commitment of DG Bank and Deutsche Bank to make a market in the bonds.

Henning Rasche, then treasurer at FHC, acknowledged to IFR in 2004 that his prime objective was not to broaden the sector’s foreign investor base but to attract German investors who wanted more liquid transactions. “The sector’s internationalisation came as a pleasant surprise, starting in the Netherlands before expanding to France,” IFR said.

But expand it has. What was once simply the Pfandbriefe market is now the covered bond market and issuance has spread from the core countries across the world.

1996: Deutsche Telekom’s US$13bn privatisation – German retail joins the party

Following the flurry of UK privatisations in the 1980s, the trend spread to Europe in the following decade, with governments in Germany, France and Italy selling to the public some of their prized jewels. None was bigger than Deutsche Telekom, the largest phone company in Europe, which sold shares in Frankfurt, Tokyo and the US in late 1996.

Germany’s lack of an equity culture had some worried about the transaction initially, but that didn’t deter global co-ordinators Deutsche Bank, Dresdner Bank and Goldman Sachs. Germans flocked to the transaction, with the offering four times oversubscribed. But elsewhere, demand was even more impressive: 25-times cover in Continental Europe, 10-times in the UK and 15-times in the rest of the world.

The original offering was increased by 20% to raise DM17.5bn, making it the largest ever equity deal from Europe. The company could have raised even more, but the decision was taken to price the transaction in the middle of the range so as to leave some upside for retail investors once the shares traded – and giving them a 6% yield.

“With investors scrambling for stock, there was very little price-sensitivity in the book,” IFR reported at the time. “Although demand suggested that the stock could have been priced at the top end of the DM25–DM30 range, it was decided to leave something on the table with the stock priced at DM28.50, or DM28 for retail investors for the first 300 shares allocated.”

The IPO was perhaps the single most important transaction in building retail interest for equities in Europe’s biggest economy, opening the doors for many companies to follow. Some 65% of the issue was placed domestically, of which a third was placed with German institutions and two-thirds with retail. Tellingly, 85 pages of names – some 4,300 accounts – did not receive a direct allocation.

On the first day of trading, the shares rose as high as DM34.10 and closed at DM33.20. On a euro-adjusted basis, the shares sextupled over the next 3-1/2 years, but now languish at just half the IPO level. The impact of the deal has not been lost, however.

1997: China Telecom’s US$4.2bn IPO: landmark privatisation

It is hard to imagine many more challenging times than late 1997 to attempt a record-breaking Asian IPO. The Asian crisis had begun in May, and the effects were soon to feed through to the Hong Kong market.

Against this backdrop, China Telecom, since renamed China Mobile, achieved the largest Chinese equity raising by that date, completing a US$4.2bn IPO in Hong Kong and New York. Investors were excited by the Chinese government’s plans to inject mainland assets into Hong Kong-listed companies and had piled into “red-chip” stocks, but still the deal was in uncharted territory.

“This was the first central government-sponsored, massive privatisation through an IPO, so people didn’t know how it would play out over the longer term,” said Mark Machin, who worked on the deal during a 20-year career at Goldman Sachs and is now Asia president of the Canada Pension Plan Investment Board. “It was also an entirely new sector from China. There were no other publicly listed telecom entities from China at the time – this was the first.”

Joint bookrunners CICC and Goldman Sachs were awarded the mandate in April.

“The mandate was pretty simple, but also pretty daunting: do an IPO of something in the telecom industry, make sure it’s over US$2bn, make sure it’s done in Hong Kong and New York, make sure it’s done by October, and make sure it’s a huge success,” said Machin.

The bookrunners had the relative freedom to choose which telecom assets to include, looking for example at China’s satellite communications sector before settling on its nascent mobile network as the most promising listing candidate, and choosing its two most developed provinces to include initially, with others to be injected later.

After that, a management team had to be put into place swiftly and an extensive restructuring completed, with chairman Shi Cuiming joining from the Ministry of Posts and Telecommunications, and Ding Donghua joining as chief financial officer.

“The CFO we only finalised a couple of weeks before the research analyst presentation,” said Machin. “We were cooped up in a hotel in Shenzhen, and day and night we briefed him on every possible aspect of the company and the financials. The hotel was completely empty except for us.”

Hiked

The leads went out with guidance of HK$7.75–$10.00 per share, but hiked it to HK$9.50–$12.60 as momentum built, eventually pricing it at HK$11.80.

“We went to every corner of the market worldwide and turned over every rock to find investors,” said Bi Mingjian, previously CICC’s deputy CEO and head of the CICC telecom team. 

The stock was listed in Hong Kong on October 23, a day on which the Hang Seng index fell 10.4%. Despite that setback, China Telecom recovered to end the week 3% above its IPO price.

The success of the IPO provided a template for China to restructure and list state-owned enterprises.

“It had great significance for what happened later on,” said Bi. “PetroChina and Sinopec were fully convinced that this was the way for them to solve their problems.”

The listing of the first Chinese “national champion” cleared the way for others to follow in the aluminium, energy and financial sectors.

“Ministries were turned into industries,” said Greg Chu Gang, CICC’s acting head of capital markets and vice-chairman of its investment banking committee. “A wave of blockbuster deals were launched in Hong Kong.”

As well as providing a gateway for Chinese companies to tap foreign capital, the deal also put Hong Kong on the map for foreign issuers.

“The Hong Kong market was still a regional market then,” said Bi. The biggest H-share deal at that time had been the US$600m-equivalent IPO of China Southern Airlines, but many foreign issuers have since been lured to Hong Kong, with IPO activity in the city-state often beating that in the US markets.

In addition, foreign investors now pay more attention to Chinese companies.

“Because of the growth of the market, large international investors have set up shop and beefed up their research efforts,” said Chu. “International money understands China a lot better.”

And lately, there have been more listings coming from – admittedly smaller – private sector companies rather than solely SOEs. The domestic investor base has also changed, said Chu, with Chinese corporates investing in IPOs and more mainland funds and insurance companies establishing capacities to invest in the Hong Kong market.

All that didn’t begin with the China Telecom/Mobile listing. But the deal was the major landmark along the way.

1997: David Bowie’s US$55m music royalties-backed securitisation – Bowie Bonds

IFR came over all star-struck when it came to report David Bowie’s US$55m so-called Bowie Bonds. “Ziggy Stardust has secured enough cash to take him well into his Golden Years,” the magazine gushed.

As befitting an icon such as Bowie, even the manner in which the deal came about quickly became the subject of myth and legend.

The story went that Bowie and his business manager Bill Zyblat were “turned on to the idea of asset securitisation while trapped on a plane to Bermuda chock-full of ABS market players heading for a conference”, IFR reported. “A chat ensued on the nature of their business and the suggestion was made to Bowie that almost anything can be securitised – even his future royalty rights.”

Sadly, David Pullman, head of all structured debt for Fahnestock & Co, the arranger, dismissed such talk, insisting to IFR that he had been approached by Zyblat at least two months before Bowie stumbled upon the group of conference attendees on his way to purchase a home in Bermuda. “It’s a bit of a stretch to think I could sell him [the idea] on a plane,” Pullman said.

The issue had a 10-year average life, and paid a coupon of 7.9%. It was called at par in 2004.

A series of deals backed by music royalties followed, though in truth not as many as had been expected. What is not in doubt, though, is that Bowie, a pioneer in so many other areas, had pushed this small corner of the capital markets forward, too.

1997: JP Morgan’s US$700m Bistro bond: the first CDO

About a week before Christmas 1997, JP Morgan launched the rather clunkily named Broad Index Secured Trust Offering, a US$700m bond issue referencing a portfolio of more than 300 corporate and public finance credits across Europe and North America.

When it comes to trades that have changed the face of finance, Bistro ranks right up there. The structure’s popularity and later bastardisation, which involved some originators injecting dubious assets such as sub-prime mortgages into underlying reference pools, has ensured it remains one of the most controversial capital market inventions ever devised.

It was also one of the most important. Hailed as a landmark at its inception, Bistro was the first time a bank succeeded in hedging economic risk while simultaneously releasing regulatory capital. To this day, it remains the template for bank balance-sheet hedging.

“The over-arching motivation for Bistro wasn’t to open up a new market or sell some funky product, but for JP Morgan to hedge its credit risk,” Bill Winters, former co-chief executive of JP Morgan’s investment bank, told IFR in a recent interview. “It was extremely effective in accomplishing that. It also had the effect of spawning a new industry.”

At the same time as a more liquid credit default swap market was being built in the mid-1990s, JP Morgan began examining ways to hedge its loan and bond books. The project was led from JP Morgan’s New York office, where Blythe Masters was a senior member of the credit team.

After fine-tuning the structure over the summer months, the first Bistro deal came to market in December 1997. A special purpose vehicle sponsored by the bank entered into a CDS with a notional of US$9.8bn referencing a JP Morgan portfolio of 307 commercial loans, corporate and municipal bonds.

The SPV then sold some US$700m of notes backed by the CDS to investors: a US$460m Aaa/AAA tranche and a US$237m Ba2 tranche. A block of US Treasuries was inserted to collateralise the deal over the first five years of its life.

Investors snapped up the bonds and Bistro looked set to supersede the cash-based collateralised loan obligation market and earlier synthetic deals – such as SBC Warburg Dillon Reed’s Glacier Finance vehicle – as the weapon of choice for loan portfolio managers.

But it was in the summer of 1998 that its place in history was cemented, shortly after JP Morgan printed its second Bistro transaction of US$346m of notes referencing a US$4.8bn CDS. After painstaking talks with the US Federal Reserve, the regulator permitted JP Morgan to apply a model-based approach to calculating the risk capital on its trading book. This meant the bank could secure regulatory capital relief for its first two deals.

A new era was born and the bank was justifiably proud of its achievement. JP Morgan printed five Bistro deals in less than a year: US$2.7bn of securities amounting to a total risk transfer of US$29bn.

“Bistro was originally put together as a vehicle that we saw value in as an originator of loan and bond transactions,” Masters told IFR in 1998.

The bank began to market the technology to other institutions, which soon developed copycat structures.

“Bistro was very important for changing the mindset around risk management. It was the major catalyst for credit portfolio management,” Winters recently told IFR.

Volumes mushroomed. Synthetically funded collateralised debt obligations rocketed from US$10bn outstanding at the turn of the millennium to a peak of US$105bn in 2007.

But the market was swerving out of control. Convinced of the infallibility of their mathematical models, structurers embraced complexity for complexity’s sake. Fatally, some inserted real estate assets including sub-prime mortgages into the reference pools.

Many banks failed to shift the super-senior risk of the portfolios off their books, or bought what would become largely worthless protection from monoline insurers. In short, the market had strayed far from its roots.

Those firms that faltered as a result would have done well to heed the rather prescient words of Peter Hancock, JP Morgan’s global head of fixed income when the Bistro was executed, shortly after the trade first came to market.

“We work in a cyclical industry, in which issues of risk control are vitally important. Short-term profitability is no substitute for sustainable performance over the long run,” Hancock told IFR in early 1998.

1998: Republic of Korea’s US$4bn dual-tranche Global – back with a bang

South Korea drew a veil over a couple of turbulent years with its first ever Global and the largest bond issue from Asia at that time: a US$4bn five-year and 10-year dual-trancher that attracted US$12bn of demand.

Having been admitted to the exclusive OECD club of developed industrial nations at the end of 1996, South Korea was reduced to begging for financial assistance from the IMF just a year later – for up to US$60bn of bailout funds.

A debt restructuring package in March 1998 resulted in the rollover of some US$22bn of debt, although, as IFR reported of the following month’s transaction: “It was the sovereign’s Global bond issue that stands out as the pivot in the country’s financial rehabilitation process.”

Lead managed by Goldman Sachs and Salomon Smith Barney, the paper emerged after what was termed “a long and gruelling roadshow”.

The spreads on the US$3bn 10s and US$1bn fives were gradually ratcheted in, with both being priced inside initial and revised guidance, and the longer tranche being upsized from early indications of US$2bn. Even so, the paper snapped considerably tighter in the weeks following pricing.

As evidence of the true global nature of the issuer’s rehabilitation, just 5% of the bonds were placed in Asia, with the US accounting for 70% and Europe 25%.

1999: Goldman Sachs’ US$3.2bn IPO – partnership no longer

Partners at Goldman Sachs had debated whether or not to go public for decades, but in 1999 – with the wind of regulation definitely changing and the Glass-Steagall Act about to be rescinded – the firm’s employees finally voted in favour of launching what would become the second-biggest IPO in US history.

But while the pro-IPO camp won out, the listing itself remained extremely conservative, with partners keen to protect their 130-year control over the firm. Just over 10% of the company’s shares were sold to the public, with partners and current employees keeping the lion’s share. The deal was designed to raise US$2.7bn of capital for expansion without letting go of the reins.

As ever, the firm couldn’t have timed the offering any better. The IPO was first announced in March, just as the Dow Jones touched 10,000 for the first time. By the time the deal came to market in early May, the index was 10% higher, and investor sentiment even more insatiable.

Despite the small stake on offer, investors rushed to snap up shares. The deal drew bids for more than 750m shares, with Goldman as lead expanding the deal to include the 9m primary share greenshoe at pricing. In a rare show of modesty, Goldman shares were valued at around 25-times 1998 earnings compared with Merrill Lynch’s 27-times. Its better-valued rival would need a rescue just a decade later.

“Dubbed the deal of the year from its very beginning, the second largest-ever US IPO was expanded at pricing, dramatically oversubscribed on no price sensitivity, placed with the bluest institutional accounts and high-net worth clients and traded up 32% on a down-market day,” IFR said at the time.

Between the listing and their high-point, the shares more than quadrupled – before falling back below the IPO price in late 2008. But even more impressive was how the deal helped catapult Goldman even further into the major league. Pre-tax earnings of US$3bn a year prior to the IPO were US$13.4bn a decade later, just one year after the credit crisis killed off some of its biggest peers.

1999: Olivetti’s €22.5bn acquisition loan – redefining the market

Olivetti’s blockbuster €22.5bn loan in April 1999, which backed its US$65bn hostile bid for Telecom Italia, redefined European loan market capacity and paved the way for a succession of “super-jumbo” loans to support the realignment of Europe’s telecoms sector.

The arrangers of Olivetti’s loan – Chase, DLJ, Lehman Brothers and Mediobanca – won rare praise from the market for their successful strategy, which wooed an initially sceptical banking market with the overwhelming commercial logic of a rich margin and fees.

Olivetti’s €22.5bn three-year revolving credit was priced at 225bp over Libor, while top participation fees were 175bp.

The strategy of throwing money at the problem proved highly successful – Olivetti received an unexpectedly high 90% acceptance rate from invited banks, which raised €32bn.

The composition of the senior bank group, which included five Italian banks, included many lenders not typically associated with big-ticket underwritings and at €1bn each they were, at the time, the highest individual commitments ever made to a European loan.

The loan was allocated in June 1999 after being reduced to €6.5bn thanks to bond issuance. The 81 banks that eventually signed into the deal saw heavy scale-backs, with the underwriting banks cutting their exposure by 60% and banks joining in general syndication halving their commitment levels. 

“The Olivetti deal was unique, bold and pioneering on almost all fronts. It proved the art of the possible and tested the depth of European bank liquidity,” said Kristian Orssten, head of EMEA loan and high-yield capital markets at JP Morgan. “The deal essentially set the structural and de-risking template for all future jumbo acquisition finance deals.”

2000: PCCW’s US$12bn financing for takeover of HKT - jumbo LBOs hit Asia

To many in the UK, Doncaster is a slightly down at heel town in Yorkshire, boasting (if that is the right word) a perennially under-achieving football team. For all those involved in financing the US$35.9bn takeover of Cable & Wireless HKT by Pacific Century CyberWorks in early 2000, though, the name means something very different.

Indeed, the name is etched into their memories and imprinted on their resumes. It is synonymous with audacity and also with the groundbreaking and defining transaction that paved the way for subsequent multi-billion M&A financings from Asia.

Doncaster Group was a wholly-owned subsidiary of PCCW, which raised US$12bn in loan financing to back the giant bid for C&W HKT.

“Deals like this don’t come along very often,” one banker had said just a week after PCCW lined up four banks in late February 2000 to provide the acquisition financing.

Those were prophetic words. To this day, no other loan from Asia (ex-Japan) has come close in enormity, challenge and successful execution.

It is still the largest M&A loan from Asia ex-Japan and it came at a time when Hong Kong’s syndicated loan market was very small – PCCW’s borrowing was larger than the entire volume of syndicated loans completed in the territory the previous year.

It was a crowning moment for the four leads – BOCI Capital, BNP Paribas, Barclays and HSBC. And yet when the quartet set about selling down their underwriting exposure, few would have expected the outcome.

Launched mid-March 2000, the selldown was completed a month later – perhaps the fastest execution for such a gigantic financing from Asia. Twenty-seven lenders agreed to sub-underwrite, committing US$22bn between them and definitively ruling out the need for general syndication. Of those banks invited, only two were believed to have declined to take part.

PCCW was a mere investment holding company with hardly any operating history when it outbid other more established players such as Singapore Telecommunications to acquire C&W HKT. It was able to do so simply because PCCW was formed by Richard Li, the younger son Li Ka-shing, the Hong Kong tycoon – and a man with whom banks across the industry wanted to curry favour.

It wasn’t just Richard Li’s family connections that got the deal away, though. The deal came at a time when the TMT boom was still booming.

Staggering

The loan’s take-up was all the more staggering given the status of the deal that the banks were supporting. At the time the loan was signed, the HKT acquisition had yet to go through. The structure of the deal afforded the lenders no recourse to PCCW itself, as it was secured over the HKT shares that were being bought. Had the acquisition failed – and there was a moment when it seemed it would – the banks would have been left with a loan with no security to a creditor with no assets.

The hangover of the M&A and the heavy debt load led to PCCW returning to the loan and bond markets frequently in subsequent years. For that reason, lenders that took part in the deal had no cause for regret, given the amount of follow-on business the company generated.

It is another matter that equity investors reposing faith in PCCW at the time lost their shirts – the company’s market capitalisation currently represents less than 10% of the price it paid to acquire C&W HKT.

The financing was split into a US$5.4bn 364-day loan, a US$3.6bn 364-day facility with two extension options at the end of the first and second years, and a US$3bn 90-day tranche. Only the first two tranches were syndicated, with banks joining with US$1bn in underwriting commitments receiving 220bp all-in for the first year, 325.5bp for two-year exposure and 435bp for three-year risk based on an initial margin of 115bp over Libor.

“The PCCW deal was a real success, and not just because of its size – though it was 2-1/2 times the size of Japan Tobacco’s US$5bn deal in 1999,” Clarence Tao, head of Asian loans at BNP Paribas, told IFR at the time.

“The execution time was very short and it had a very, very good hit ratio. Neither the structure nor the credit were straightforward: here was a bridge acquisition with a quick take-out needed to prevent the costly term-out provision.”

2001: Glas Cymru’s £1.92bn bond: foundation of secured bonds/WBS

Glas Cymru’s £1.92bn whole business securitisation from 2001 was a complicated animal, mixing wrapped and unwrapped, conventional and index-linked bonds (both LPI and CPI) – all timed to take out an acquisition financing with a sterling bond deal unprecedented in size. It was a journey into uncharted waters, but it worked to drive utility financing to a new level.

The package stemmed from Hyder looking to offload the water utility part of Welsh Water. Glas Cymru acquired it through Dwr Cymru using a bridging loan from Citigroup and RBS. This was refinanced by the WBS secured by the company’s assets.

The issue’s legacy is just as impressive as its structure, providing a template for other whole business structures and acquisition financings.

“It was a real David and Goliath situation,” said Chris Jones, who was finance director of Dwr Cymru at the time and who was about to become chief executive. “There were just two of us, myself and Nigel Annett [executive director] looking to take control of a large and very important business, which had already been subject to one takeover in the recent past and which was not able to invest as it needed to for the benefit of its customers because of the ongoing uncertainty about its future.”

The decision to finance the acquisition through debt brought significant advantages.

“The key thing is that it was the first large transaction which relied on an analysis of a regulatory framework to support the credit. Consequently, a radically different financing structure was possible to allow Glas Cymru to purchase Welsh Water in a competitive situation funded entirely through debt,” said Richard Bartlett, part of the team involved at RBS and now the bank’s head of corporate DCM and risk solutions, EMEA.

The regulated asset value had not been considered to such a degree in previous financings, but this deal changed market convention. “Now every regulated transaction is structured in the context of RAV,” said Bartlett.

Numerous deals have borrowed Glas Cymru’s WBS technology. Through covenant packages, companies have increased gearing, cut capital costs, extended duration, boosted debt ratings and calmed investors through incentivised payments such as cash sweeps to pay down debt.

“For the broader market, it was the first in a series of such transaction structures, initially in the water industry and latterly in aviation and gas, which have seen major companies financed on the back of a regulatory framework. It was completely radical then but is now an established part of the sterling market,” said Bartlett.

The deal took some explaining in a dotcom-obsessed environment, with 85 one-on-one meetings. But it was time well spent.

“At the time, infrastructure was out of favour, as everyone was focused on the tech sector. But we had a secure income stream and solid RAV and received orders of around £3.5bn for the £1.9bn we needed to raise,” said Jones.

Funding solely through debt suited the company’s structure, with no risk of tension with equity holders. 

“The company had stable cashflow, which allowed it to support that amount of debt issued. It made sense versus equity financing. No-one had introduced the concept of leveraging a company at that level with such duration. It was the right capital structure for this type of company,” said David Basra, who worked on the deal for Citigroup and has gone on to become the bank’s head of EMEA debt financing.

Pubs had issued secured debt before, but they were more based on real estate asset finance. This issue “went a step further than the pub concept. It blew the cover off it by using the entire asset base and operations of that company”, said Basra.

The deal initiated a momentum shift in gearing levels, valuations and cost of capital for the sector. Structuring trades to achieve high investment-grade ratings has not only saved companies money but also increased investor confidence in them through sturdy capital structures and covenants.

The deal was priced at a relatively small discount to RAV (around 93%), but companies have since achieved healthy premiums. The Borealis offer for Severn Trent, for example, was 130% RAV. 

“It turned the utility sector from [a sector with] lazy balance sheets to something that could be levered up,” said David Dubin, presently head of EMEA infrastructure and project finance at Citigroup, but then co-head of the European business of MBIA, which wrapped £1bn of the deal.

And customers continue to benefit from a structure implemented a dozen years ago. “We have returned around £200m through dividends and rebates. It has worked out better than we expected. It’s amazing how it has become a template for utility financing,” said Jones.

2004: Google’s US$1.67bn auction IPO: listing of a tech colossus

Google’s decision to opt for a rarely used modified or “dirty” Dutch auction to complete its US$1.67bn IPO in 2004 was far from an unreserved success but the idea retains a place, if a rarely accessed one, in the ECM toolkit.

From the perspective of IPO investors, time has proven Google’s IPO to be a spectacular investment, delivering a 900% gain in the nine years since it went public as the online search firm has prospered. Yet the mechanisms of the auction, algorithmic in execution and rooted in academia, resulted in a less-than-stellar outcome on valuation and investor participation.

“[Google founders] Sergey Brin and Larry Page felt that if there was going to be a financing event, the Google users responsible for that growth should be able to participate in the transaction,” said Lise Buyer, founder of capital markets consultancy Class V Group and a former investment banker.

“Too many companies go public at [as an example] US$20, open at US$50, and that profit goes into the hands of people that had nothing to do with the development of the company,” said Buyer, who was hired by Google in late 2003 as director of business optimisation and worked closely on the IPO.

Setting initial price talk of US$108–$135 on what was originally a 24.6m-share offer, an intentionally high dollar share price, was designed to force retail investors to validate their interest. Investors, both retail and institutional, were required to register for bidder IDs with one of 28 banks in an underwriting syndicate led by Morgan Stanley and Credit Suisse First Boston.

Operating under the mantra “Don’t be evil”, Google management elected not to provide formal earnings guidance. Part of the rationale, recalled Buyer, was to avoid tripping securities laws that prohibited selective disclosure, given the high level of retail investors that would not be privy to the guidance. Another was that Google was growing so rapidly at the time that management lacked visibility to properly guide analysts of the underwriting firms.

The break from tradition did alienate some institutions. Retail demand was also muted by the decision not to offer a selling concession, a move that meant retail brokers of the underwriting firms had no incentive to push the deal to their clients.

The lack of subscriptions from both institutions and retail was evident in a reduction of the price talk to US$85–$95, and the subsequent decision by VC-backers and insiders to pare a secondary component from 10.5m shares to 5.5m shares, reducing the overall deal size to 19.6m shares – investors that had not submitted for bidder IDs from the outset were not allowed to do so after price talk was revised.

The net result was pricing at US$85.

Pricing was set on the discretion of the company and its underwriters, rather than at the marginal price needed to clear investor demand, with all investor orders scaled back on a pro rata basis. So, for example, an investor that submitted bids for 1m shares at US$100, 500,000 shares at US$95, and 500,000 shares at US$90 was scaled back to 1.6m shares if, for example, overall demand totalled 23.5m – 1.2 times coverage.

“The allocation process in a true auction is typically just a mathematical exercise, so the real benefit of an auction is the ability to create a perfect demand curve, often down to penny increments as it relates to price,” said Cully Davis, a Credit Suisse managing director specialising in tech ECM.

One result of such a scientific approach, combined with the reluctance to provide forward guidance, was that it took several quarters to on-board institutions into the company’s registry, though Google returned with follow-on sales of stock in September 2005 and March 2006 at US$295 and US$389.75, respectively.

Despite what many viewed as a flawed outcome on Google, and limited applicability subsequently, auction IPOs do have a future role. Credit Suisse rolled out its auction platform for NetSuite’s IPO in 2007, though the exercise was more designed to maximise pricing, and was mandated by Liquidnet, alongside Goldman Sachs, in 2008 on what was to have been a hybrid auction, though the deal never came to fruition.

Hybrid auctions, where there is a dedicated retail tranche but pricing is dictated by the larger, institutional pot, is gaining traction as a way to democratise participation but with a more sophisticated approach toward price discovery. DePaul University finance professor Ann Sherman, an adviser to Google on its IPO, has suggested that Twitter adopt a hybrid auction for its forthcoming IPO.

The reality is that Google offered a rare crossover of high-growth and brand awareness that suggests auction IPOs are episodic events. Lise Buyer argues that auctions may be appropriate on high-profile, wide brand-name recognition deals where there is unlimited demand from unsophisticated investors.

“One of the biggest misconceptions about an IPO is that everyone is trying to accomplish the same thing,” Buyer says. “For some companies, but not most companies, there is an alternative to the traditional bookbuild IPO.”


2009: Lloyds Banking Group’s £21bn capital-raising – riding to the rescue

The clock was ticking for Lloyds Banking Group in late 2009. Less than a year after being rescued by the UK government, the lender was under pressure – alongside rival RBS, which had also been bailed out – to sign up to the UK government’s Asset Protection Scheme, a state-backed form of asset insurance, in order to put a cap on potential losses and boost its capital ratios.

Bosses weren’t happy about the price tag that the UK Treasury had attached, however – an eye-watering £15bn. Lloyds and RBS both hoped the government might back down. It didn’t, and as the year wore on Lloyds bosses came to realise they needed another option.

What they came up with was a mammoth £21bn capital-raising – a £13.5bn rights issue and £7.5bn contingent core Tier 1 bond issue – which notched up record after record. “It is the largest-ever financing package in UK corporate history, the largest fully underwritten capital-raising in Europe and the first ever combined rights issue and exchange offer,” IFR reported at the time.

The group charged with undertaking the task (on both equity and debt tranches) was led by global co-ordinators Bank of America Merrill Lynch and UBS.

Most impressive, however, was the debt component. Lloyds announced an offer to exchange existing Tier 1 and UT2 paper into new enhanced capital notes – the first such deal that then flung open the doors of the much-discussed contingent capital asset class, with many of Lloyds’ bigger rivals following its lead. RBS was forced to use the APS, but Lloyds dodged the bullet – and the hefty price tag.

2010: Caterpillar’s Rmb1bn two-year Dim Sum bond – taste of things to come

Caterpillar’s Rmb1bn (US$160m) two-year deal at 2% through sole bookrunner Goldman Sachs in November 2010 was not the first Dim Sum bond (the earliest had come from the CDB), the first such deal from a corporate (Hopewell Holdings can claim that) nor even the first from a multinational company (that was from McDonald’s).

But it deserves it place in this list because of what it said about the internationalisation of the renminbi and the problems it solved.

Unlike earlier deals, which were largely local, Hong Kong affairs, Caterpillar’s bonds made a splash in the wider world and were broadly placed with institutional investors. Also, the company (unlike McDonald’s) had worked out how to get the deal’s proceeds to mainland China where they could be put to use. It used an inter-company loan that had all the necessary approvals from the mainland authorities.

The pricing Caterpillar was able to achieve also highlighted the disparity between the onshore and offshore renminbi markets, coming well inside onshore two-year government bonds yielding 2.95% at the time of pricing – something that made other multinationals with operations in China sit up and take notice.

Caterpillar certainly liked what it saw of the market and has recently become the first multinational borrower to return to the Dim Sum market five times.

The market itself, meanwhile, while still in its early stages has gone from strength to strength, with issuance volumes of US$15.9bn-equivalent in 2012 and turnover of Dim Sum bonds now eclipsing those of Hong Kong dollar and Singapore dollar bond markets.

2013: Apple’s US$17bn bond sale: time for iBonds

Investment bankers spent years pestering Apple, the darling of the technology world, to consider the virtues of selling debt. But years of innovative and popular new product launches – the iPod, iPhone and then iPad – had left the company, which had struggled through much of the 1990s, flush with a cash pile of US$145bn and little need for taking on debt.

But constant informal pitching, and pressure from investors to start to return some cash through tax-friendly buybacks, finally prompted the company to mandate Goldman Sachs in January 2013. Apple had seen scores of other companies issue debt to fund share buybacks, with little impact on their funding costs or ratings, and wanted a piece of the action itself.

Its decision to come to market coincided with one of the biggest bull markets for corporate bonds in history. Apple didn’t disappoint against that backdrop. The US$17bn deal attracted 2,000 orders from 900 investors, amounting to a record US$50.2bn, for six separate tranches spanning three-year and five-year fixed and floating-rate notes, plus 10-year and 30-year fixed-rate bonds.

Pricing was impressive. The leads – Deutsche Bank was added as a bookrunner alongside Goldman later – allowed Apple to lock in funding at a blended coupon of just 1.87%, with a weighted average maturity of 10.7 years. Even so, it was difficult to find an investor who did not like the deal.

“Certainly, the deal was a resounding success,” IFR wrote about the transaction. “The leads priced and sized the deal to a tee, as evidenced by its after-market trading, which saw all tranches tighten by a few basis points.”

Rather more impressive was the timing. Just weeks later, a mammoth bond-market sell-off began, with the 10-year falling below 89 and the 30-year below 82 by mid-August. One of the most-coveted issuers of all time had captured the sweet spot.

 

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To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

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