Americas Liability Management House

IFR Review of the Year 2012
4 min read

Deleverage and optimise: Low interest rates and ample liquidity created the perfect climate for companies looking to deleverage and re-optimise their balance sheets in 2012. Meeting a rush of demand for liability management, however, was not every bank’s cup of tea and only a few excelled. Citigroup was one such bank and is IFR’s US Liability Management House of the Year.

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Citigroup created a niche for itself by consistently coming up with solutions that led to a number of companies awarding it mandates solely for its expertise rather than just its balance sheet. It was the bookrunner on most of the landmark trades of the year and on innovative consent solicitations to strip out replacement capital covenants embedded in old hybrids.

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

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 Hartford sold to Allianz in 2008 when it needed emergency crisis funding.

In the same week Citigroup led Prudential’s 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 Pru up to repurchase the junior subordinated notes.

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.

“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.

The entire exercise reduced a US$5.3bn maturity tower Altria had 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.

The bank also strengthened its relationship with key clients in the high-yield markets by effectively managing their balance sheets.

One major client was Energy Future Holdings, which is considered to have one of the most complicated capital structures in the leveraged markets. Citigroup has led a number of transactions for the energy giant following its US$45bn LBO in 2007, which was the largest buyout in history.

The high-yield team priced a US$850m two-part first and second-lien senior secured offering for Energy Future Intermediate Holdings, with proceeds being used to pay a dividend to Energy Future Holdings, which then used the proceeds to pay the outstanding balance of inter-company demand notes.

“These transactions really impressed me. They were very clever and subtle tweakings of Energy Future’s capital structure to successfully raise money,” said one investor. “They raised new money and quietly subordinated existing bonds and forced existing major bondholders to participate.”

Also during the year, the leveraged finance team led three of the top four DIP financings, which included Kodak, Patriot Coal and Houghton Mifflin Harcourt.

“Those companies that wind up defaulting tend to be the most troubled financings,” said Tom Cole, co-head of leveraged finance at Citigroup. “It is confidence in our own ability to structure and distribute that leads us to be able to commit to these difficult situations.”