Investment-Grade Corporate Bond House
No stone unturned - In a year in which it was critical to determine which market, structure and currency provided optimal financing levels, an underwriter offering the full spectrum was in high demand. With a stable of dual-currency, retail hybrid, first-time Yankee and benchmark strategic transactions to its credit, Citi is IFR’s Investment-Grade Corporate Bond House of the Year.
To adapt the popular sports cliché, 2007 was a year of two halves in the corporate debt market. After an extremely bullish first half, when even the most tainted credit could secure capital at a minimal spread, the liquidity squeeze rapidly transformed the landscape. With many key benchmark transactions remaining on the horizon, the ability to advise unaccustomed issuers on a range of structures, without currency bias, was crucial to steady performance in an inconsistent year.
The volatility eventually sorted underwriters by currency and product offering, amid an environment in which banks possessing a truly global franchise rose to the top. Citi played a leading role in re-opening the euro market, reinforcing its already dominant position in the US dollar and Yankee markets, and was also active in the sterling market.
“This year was particularly satisfying because of the support and endorsements we’ve received from clients,” said Peter Aherne, head of North America Capital Markets at Citi. “That support not only showed up in the league tables, but also in the breath of transactions we led for some of the most sophisticated borrowers.”
Citi found itself in a familiar position in the US corporate, or non-financial, debt market, where it topped the institutional league table with US$19.2bn underwritten. Its market share climbed to 20.4% by the end of the third quarter 2007, up from 17.4% a year earlier.
As the turbulence erupted in the summer, several large investors looked to increase duration in anticipation of a reduced Federal Funds target, and a constructive relationship with the buyside helped Citi maintain its leadership of the corporate market.
Indeed, its market share swelled during one of the most severe bouts of volatility of the summer as the firm underwrote 41% of the US dollar-denominated industrial deals from July 1 through the end of September. Although mandates had already been awarded before the summer, the firm’s market share for Yankee non-financial trades during that same timeframe was an impressive 82%.
During that period, Citi served as joint lead on what emerged as the largest unsecured transaction in five years as AstraZeneca printed a US$6.9bn multi-tranche offering in early September (AstraZeneca is IFR’s Corporate Issuer of the Year). Enel also chose Citi as joint lead on its US$3.5bn three-part debut transaction, the largest ever from a Yankee utility, drawing US$5.5bn in demand from 130 investors. Other Yankee trades from Husky Energy and Canadian National Railway followed.
Citi led a number of key domestic transactions during this period: Kraft Foods printed US$3.5bn in its first trade since being spun-off from Altria; Johnson & Johnson executed its first transaction in four years; Wal-Mart made its largest ever offering; and Starbucks made its investment-grade debt debut.
“Citi was behind some of the most innovative corporate financings in 2007, taking full advantage of the first half of the year when conditions were appealing and showing strong leadership and strength during more difficult times,” said Eirik Winter, co-head of fixed income capital markets for EMEA at the bank. “We are currency agnostic, reflected by our ability to offer on-the-ground advice about the US market during London time. Support from the leads in terms of knowledge, leadership and status is everything, and that is why clients turn to Citi in all market conditions.”
The leadership the bank demonstrated in helping the euro corporate market emerge from the summer turmoil was one of its notable contributions in 2007. Two transactions in particular captured participants’ attention in restoring this beleaguered market, and Citi was at the forefront of both of them.
AstraZeneca successfully reopened the senior corporate primary market in euros with its €750m seven-year transaction after a hiatus of seven weeks, on the heels of its jumbo US$6.9bn financing in the US. This provided the euro market with a much-needed pricing benchmark and opened the door for other issuers to follow suit. Among them was E.ON, which surfaced the following week with a dual tranche €3.5bn five and 10-year offering under Citi’s stewardship.
The package commanded an order book of €12bn from over 500 accounts, many of which had returned to the market for the first time since the first half of the year. This quashed perceptions that investors were reluctant to get involved, thereby restoring confidence at a difficult time, while improving liquidity for subsequent issuers. Carrefour, TNT, ENI, British Telecommunications, WPP and CEZ were among those that capitalised on this window of opportunity, all guided by Citi.
As spreads in the institutional market vacillated throughout the year, specific markets presented moments of opportunity for those names that could take advantage of them. As savvy borrowers looked ahead at a slower US economy in the latter half of the year, the prospect of monetising a call option via issuance in the retail market was an increasingly attractive as companies could also diversify their investor base. Citi has traditionally been one of the stronger retail firms, and it lived up to that reputation in 2007 as a slate of blue chip companies recognised by retail investors turned to the firm for capital: GECC issued US$1bn in 40-year non-call five securities via Citi as a sole lead in mid-April; Comcast placed US$550m 49-year non-call five retail notes in early May; and AT&T’s US$1.15bn baby bond offering led by Citi in February was the largest ever for an industrial issuer.
Although retail transactions typically carry higher fees, the firm emphasised its agnostic advice when evaluating the markets. “When advising clients, we put the price for retail and institutional debt side by side and let the economics speak for themselves,” said Aherne.
The retail channel also came into play as tax-deductible hybrid instruments received broader acceptance from non-financial borrowers. At the height of this summer’s turbulence, Citi served as a joint lead on a US$350m 60-year non-call five retail hybrid from Florida Power and Light as well as a US$100m 40-year non-call five transaction from Pennsylvania Power and Light.
When the institutional market found moments of stability, Citi shifted gears with underwriting roles on hybrids from Wisconsin Power and TransCanada Pipelines.
Meanwhile, issuance volumes in the European corporate hybrid market fell short of many expectations this year as the market volatility and another move of the goal posts by the rating agencies hampered progress. However, it was still a significant year for structural innovation and the transactions that did materialise took the market another step forward.
Citi underlined its credentials as a leading corporate hybrid house by spearheading Rexam’s innovative M&A driven 60-year non-call 10 offering, the inaugural foray for a UK corporate into the hybrid market. Besides opening the market for UK corporate issuers, the pioneering transaction included several important market “firsts”, such as the inclusion of a substitution or variation provision, permitting Rexam to vary the terms to the extent required to cure an accounting event, capital event or tax event for the material benefit of investors. Such additions benefited both the issuer and investors, creating a new template for structuring corporate hybrids.
With corporates increasingly agnostic regarding currency, cross-border transactions were commonplace for issuers looking to broaden their investor base while capitalising on more attractive funding opportunities. Citi illustrated its leadership in this growth area, bringing the likes of Royal Caribbean to the euro market and spearheading successful dual currency packages in sterling and euros for companies like WPP. Citi also devised a strategy with Atlas Copco to bring the issuer back to the market for the first time since 1999. The resulting US$800m 10-year and €600m seven-year transactions received a very warm welcome from investors.
UK retailer Marks & Spencer’s decision to enlist Citi for its first foray into the bond market in three years – and the first since the completion of the first stage of its recovery plan in 2007 – was another notable achievement in sterling. The £400m five-year benchmark was almost five times oversubscribed, allowing for pricing at around 8bp–9bp through its curve, a great achievement for the borrower. Citi also demonstrated its flexibility across the curve by steering already established sterling borrower Wal-Mart to take £1bn out of the 2039 maturity back in December 2006. Such deals typify Citi’s accomplishments in a market still dominated by a handful of houses.
And Citi earned its stripes in liability management as well by acting as sole consent coordinator and solicitation agent on Norsk Hydro’s multi-currency consent solicitations/like-kind exchange. It included 12 series of US dollar bonds totalling US$2.6bn and approximately €300m equivalent of euro and sterling bonds, linked to the transfer of the oil, gas and wind energy businesses, and certain other assets of Norsk Hydro to Statoil ASA. It successfully executed at low cost, using Citi’s full strength and global reach in liability management and fixed-income platforms.
Andrew Perrin, Andrew Stein