Tuesday, 11 December 2018

US Investment-Grade Bond House

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  • Standing out from the crowd

The whole package: In a market flush with liquidity and low rates it is difficult for underwriters to differentiate themselves. Yet Citigroup managed to do so in 2012 by providing corporates with innovative methods of accessing capital and transforming balance sheets, making it IFR’s US Investment-Grade Bond House of the Year.

To see the full digital edition of the IFR Americas Review of the Year, please click here.

Citigroup, like its biggest rivals, had a field day in 2012, as low rates and an avalanche of cash into investment-grade funds played into its hands by creating endless refinancing opportunities for US corporates.

It comes as no surprise, then, that Citigroup got its fair share of US corporate mandates and helped many of its clients to set record-breaking low coupons. It was also to be expected that Citigroup would figure prominently among the active bookrunners on many of the year’s biggest transactions, such as United Technologies’ US$9.8bn offering and General Electric Co’s rare appearance with a US$7bn deal.

It also notched up stand-out Yankee deals like Heineken’s US$3.25bn acquisition financing, Bristol-Myers Squibb’s first showing since 2008 in the US, with a US$2bn transaction, and the groundbreaking simultaneous offering of senior unsecured and covered bonds by the Commonwealth Bank of Australia.

Big in LM

Yet where it really excelled was in liability management and innovative financing packages for US corporates, helping European banks regain access to the US capital markets for senior unsecured bonds and capital securities, and taking US financials to the institutional and retail perpetual preferred markets for Tier 1 capital.

Liability management was one of the key trends in 2012, as corporates looked at ways of increasing shareholder value through spinoffs, reducing debt costs and optimising their capital structure.

Citigroup was bookrunner on most of the landmark liability management trades of the year, such as Kraft’s spin-off financing package, the restructuring of AIG (IFR’s Americas Issuer of the Year), Phillips 66’s spin-off, and innovative consent solicitations to strip out replacement capital covenants embedded in old hybrids issued before the financial crisis by the Hartford Financial Services Group and Prudential Financial.

The Kraft Foods Inc spin-off of its grocery businesses into the new Kraft Foods Group (IFR’s America’s Financing Package of the Year) took six months of finely-orchestrated deal executions, on all of which Citigroup was an active joint bookrunner. It included an US$800m interim financing floater for the parent in January, a US$6bn inaugural debt offering for the new Kraft Foods Group in May and a US$3.6bn par-for-par exchange transaction by the new company in June.

Consent solicitation trades were Citigroup’s liability management specialty. In one week in April it was bookrunner on two of the most high-profile consent solicitation trades of the year, Hartford and Prudential.

Crisis funding

The Hartford deal, led by Citigroup and Goldman Sachs, involved a simultaneous consent solicitation for a replacement capital covenant, senior unsecured issuance and the redemption of an old hybrid it sold to Allianz in 2008 when it needed emergency crisis funding.

Hartford raised US$2.15bn of senior and subordinated bonds, which it used along with another US$300m of cash on hand to buy back US$2.43bn of 10% 2068 hybrids it sold to Allianz, along with 69.4m of warrants, in 2008.

Before Hartford could repurchase any of those hybrids, however, it needed to convince holders of its US$408.77m 6.10% 2041 senior unsecured bonds to terminate a replacement capital covenant they found themselves in possession of when the hybrids were issued.

Hartford needed approval from holders of its 2041s to forgo their right under the RCC to be paid back first before Hartford paid off the hybrid.

The challenge was to get those bondholders to do so without allowing them to extort a high price for the RCCs. Those bondholders essentially had Hartford over a barrel, realising that apart from reducing the company’s interest payments, redeeming the hybrids would take out Allianz and put paid to market chatter in Europe that Allianz might either buy Hartford or sell its stake.

The underwriters drove a hard enough bargain to cap the cost of the RCC at 1.75 points per US$1,000 face value of bonds. Although that was higher than the initial one point first offered, it was a price that was significantly lower than the amount charged by bondholders of some other companies doing similar trades, and an attractive result, given that Hartford had to consider the needs of Allianz.

In the same week Citigroup led a Prudential consent solicitation to strip unwanted RCCs attached to 6.625% 2037s, which were originally executed in connection with old junior subordinated notes due 2068. Citigroup was able to get a 95% participation rate from bondholders, at a price of just one point, freeing Prudential up to repurchase the junior subordinated notes.

Waterfall tender

In August, Citigroup was bookrunner on a creative waterfall tender structure for Altria, which took advantage of investors’ willingness to give up Altria bonds trading at very high dollar prices – albeit with coupons of as high as 10.2% in return for bonds sold close to par.

The tender involved US$8.3bn of old bonds with coupons ranging between 9.25% and 10.2% and maturities between 2019 and 2039.

Altria limited the total amount of bonds accepted by setting a tender cap of US$2.8bn and gave first priority to tenders of the 9.7% notes due 2018 and the 9.25% notes due 2019. 

“There was an acceptance priority assigned to each bond, such that if the aggregate amount of securities tendered exceeded a tender cap, the first priority securities would be accepted ahead of the second priority securities,” said Peter Aherne, Citigroup’s head of North American capital markets, syndicate and new products.

Although it was not done as an exchange, investors in the old bonds were offered positions in a new offering (US$1.9bn of 2.85% 2022s and US$900m of 4.25% 2042s) a few days after the announcement of the tender.

The entire exercise reduced Altria’s US$5.3bn maturity tower by US$2bn, increased the average life of its debt portfolio by more than two years and reduced its average coupon.

Citigroup was involved in AIG’s restructuring on a number of different levels in the investment-grade loan and bond markets.

In August, the bank led a US$250m 2.375% 2015 offering of subordinated notes by AIG to lay the  groundwork for a liability management exercise involving eight hybrids it issued in 2007 and 2008 across euros, dollars and sterling.

The subordinated notes were issued primarily so AIG could migrate replacement capital covenants associated with some of the eight hybrids to the new three-year subordinated notes.

As part of the offering, AIG solicited consent from the new bondholders in the three-year sub debt to amend all of the existing replacement capital covenants associated with the old hybrids.

Pricing tension

Citigroup was one of the leading banks when it came to devising structures that used retail bids for perpetual non-cumulative preferred Tier 1 deals to create pricing tension among institutional investors. It was an active bookrunner with Morgan Stanley on PNC Financial’s US$1.5bn non-cumulative preferred, structured as a 10-year non-call, fixed-to-floating rate structure to appeal to institutional investors, but also featuring US$25 par denominations to attract retail investors.

Citigroup also aggressively went after Yankee FIG business. It was one of the most active underwriters of Australian unsecured and covered bonds and was a key player in reopening the US bond market to European banks in 2012.

The bank was a bookrunner on ING’s inaugural 144a offering in the US bond market July, with a US$850m 5.507% 10-year offering and reintroduced Societe Generale to the market in October with a US$1.25bn 2.75% five-year.

On its own deal, investors were wooed with an attractive pricing on its own US$1.5bn Tier 1 capital issue in October, the first time it had approached the pref market since it threatened holders of the paper with dividend suspension in 2009 to coerce them into a capital-boosting exchange into equity.

The self-led deal, done a week after news of CEO Vikram Pandit’s forced resignation, started out with a very attractive 6.375%–6.5% initial guidance on an institutionally targeted perp non-call 10 with a floating back end if it is not called.

The deal attracted more than US$7.5bn of demand, enabling Citigroup to ratchet in pricing to 5.95%, inside its outstanding 8.4% preferred trading at a yield-to-call of 6.25%.

It also underwrote the first ever simultaneous senior unsecured and covered bond issuance for Commonwealth Bank of Australia, and was joint bookrunner on Banco do Brasil’s US$1bn Tier 1 deal, the first Latin American offering designed to be compliant with Basel III.

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