North America High-Yield Bond: Dynegy's US$5.1bn triple-tranche bond

After years of consultation with OSFI, the Canadian bank regulator, RBC was the first to crack the code on how to structure an NVCC, issuing a C$500m 4% non-call five-year preferred Additional Tier 1 transaction. The RBC structure was so elegant that its competitors decided to adopt the template to issue C$4bn of AT1s, rather than try and work out a structure for themselves. “It was a bit of an arms race,” said Patrick MacDonald, co-head of RBC’s debt capital markets business in Canada. “Everyone was trying to develop a new instrument, recognising there would be a benefit to being the first.” * The peculiarities of Canadian bank capital rules mean that being a leader in AT1 structures also results in leading in Tier 2. Under OSFI rules all Tier 1 and Tier 2 debt has to be non-viability contingent capital that converts to equity, but also respects hierarchy claims of a bank’s capital securities. OSFI also wanted the conversion to equity to be contractual (rather than at the discretion of regulators), automatic, immediate and resulting in significant dilution of existing shareholders. Respecting the hierarchy claims meant the conversion formulas for the AT1s and the Tier 2s had to be in sync with one another, because in reality an automatic conversion at the point of non-viability typically sees both securities convert to equity at the same time. “Basically, we couldn’t create one instrument without also creating the other, because there has to be a symmetry among them,” said MacDonald. RBC wanted to establish the AT1 structure with its deal in January and then followed up in July with a C$1bn 3.04% Tier 2 subordinated debt trade, cementing a formula that made investors feel they had an investment that was senior to AT1s.* The formula essentially ensures that each Tier 1 preferred is converted into equity based on a multiplier of one-times the note value of the preferreds, while the multiplier on the subordinated Tier 2 notes is 1.5-times the number of shares issued per subordinated note. The conversion price for both capital instruments would be the greater of C$5 or the 10-day volume-weighted average price of the stock. Adding to the challenge was the relatively small size of the Canadian market, at least compared with euros, where a variety of different CoCo structures exist. “We wanted something simple and easy to understand,” said Peter Hawkrigg, a senior banker in DCM at RBC. “We had to find a balance between what regulators wanted in a structure but also what investors and issuers wanted so it was repeatable. Then you can look at the underlying credit [when pricing a deal] and not get caught up on the structure.” * Corrects spelling of Patrick MacDonald and adds terms of Tier 2 issue. To see the digital version of the IFR Review of the Year, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

In a year that saw corporate M&A finally make a long-awaited comeback, Morgan Stanley shone. It was lead-left on six of the 25 largest event financings of 2014 and was a bookrunner on 16 of them – more than any other bank. The firm built on that success with lead positions on large refinancings, grabbing a 4% market share and leaping five spots – up to third place – in IFR league tables ranked by lead-left positions. Crucially, it got good results for some of its biggest clients in volatile periods following massive outflows from the high-yield asset class over the summer. “We did three of the largest deals of the year in the toughest period, starting with Zebra Technologies, then with a first-time issue for Consolidated Energy and finishing with Dynegy,” said Jim Bonetti, Morgan Stanley’s head of US leveraged finance syndicate. “Those deals were a primary component of reopening the high-yield market.” Consolidated Energy had been trying to take full ownership of Trinidad company Methanol Holdings for the past four years, and its US$1.25bn two-tranche bond financed the purchase of the 56.56% stake it didn’t already own. It was a debut issue and spreads widened out as Morgan Stanley, as sole lead, was marketing the deal. Nevertheless the fixed-rate tranche was priced in line with 7% price talk. Dynegy’s US$5.1bn deal – the largest domestic US dollar bond of the year – also hit markets as plunging oil prices were weighing heavily on energy-related bonds. The transformational deal came in October and was priced wider than where the issuer had hoped in August – when it announced the purchase of assets from Duke and Energy Capital Partners – but the 6% and 7% handles across the three tranches impressed. “Dynegy wanted to de-risk, so that all it needed to worry about was closing the deals and integrating the businesses,” said Dan Toscano, head of the leveraged and acquisition finance group at Morgan Stanley. “Failure wasn’t an option.” Other banks were involved, but Morgan Stanley was the thought-leader on the transaction from start to finish. It also signed the biggest cheque of all five on the US$7.3bn underwriting commitment. The major hurdle for the company, which had only emerged from bankruptcy two years ago, was how to finance not one, but two deals. Morgan Stanley came up with the solution: placing the proceeds from the triple-tranche bond deal into two separate escrow accounts, allowing for every possible outcome on the M&A front and ensure the bonds did not trade differently. Calpine was another previously bankrupt power company to turn to the firm, pricing a US$2.85bn issue deal in July – its first unsecured bond since emerging from bankruptcy in 2008. Other highlights were a US$1.8bn unsecured deal for Forest Laboratories that financed the acquisition of Aptalis, for which Morgan Stanley provided a 100% bridge financing. The bond turned out to be one of the best buys of the year, and its price soared when investment-grade rated Actavis said it was buying the company. In a market awash with refinancings, the firm created neat solutions. It timed the market just right for TransDigm, leading a US$2.35bn senior subordinated bond issue in April that financed a US$1.6bn dividend to shareholders. The 6% eight-year and 6.5% 10-year were the lowest coupons on Triple C rated paper in those maturities since the credit crisis. Morgan Stanley won the lead-left position on a US$1.5bn floating-rate note offering for natural gas giant Chesapeake – the largest of its kind since 2006. The FRN was priced cheaper than where a secured term loan would have come. “People were asking if anyone would take a lower yield to be lower down the capital structure. It hadn’t been done,” said Toscano. “But this was a good proxy for the paper that short duration funds wanted to own.” The bank also helped pull off a unique US$405m PIK toggle note issue for investment firm Fortress in June that financed a new Florida passenger railway service. The

The package included the largest high-yield bond issue ever – a US$10.9bn-equivalent offering from Numericable – and achieved much tighter pricing than many in the market had been expecting. “It was the largest, most complex cross-border deal of the year,” said Nick Jansa, head of European leveraged DCM at Deutsche Bank. Much was down to the handiwork of Altice founder Patrick Drahi, who has quickly established a reputation as one of the shrewdest operators in the cable and telecoms business. Drahi was very much seen as the outsider in the battle to acquire SFR, pitted against the French establishment’s billionaire of choice, Martin Bouygues. While Drahi eventually prevailed, global co-ordinators Deutsche Bank, Goldman Sachs and JP Morgan faced the problem of how to sell a deal of unprecedented size. The solution was competitive tension. To get the best price, everything in the trade was pitted against something else: opco versus holdco, euro versus US dollars, and loans versus bonds. First, the Altice SA parent was used to issue US$5.8bn-equivalent of high-yield bonds in addition to the US$16.1bn-equivalent of opco bonds and loans at Numericable. To sell this monster holdco debt package, bankers also had to get investors comfortable with the cash streams and business risk of Altice International. Second, even though it was funding a purely French acquisition, the majority of the financing at both the opco and holdco was raised in dollars to achieve the best cost of capital; it was cheaper in the end to raise in dollars and swap back to euros. Finally, a nimble approach across asset classes allowed bankers to massively increase the Numericable bond offering to US$10.9bn-equivalent at the expense of the loan. There was a constant interplay between the sizes of each tranche in order to achieve the best results for the borrower. The euro loan was originally launched at €2.6bn but was reduced to €1.6bn, while a dollar piece was reduced to US$1.5bn from €3bn-equivalent after the bond portion was increased following strong demand. Last-minute investor appetite then saw the loans increase, finalising at €1.9bn and US$2.6bn, together making Europe’s largest-ever covenant-lite leveraged loan. The strategy worked better than anyone expected, with the bonds receiving an unprecedented US$100bn of orders, shattering the perception that European leveraged finance is the poor cousin of the US market. “If anyone asks what is do-able in terms of size and complexity in the leveraged market, Numericable is now the reference and the benchmark,” said Jansa. To see the digital version of the IFR Review of the Year, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

JP Morgan will go down in history for being the lead-left on the largest high-yield bond offering ever seen – the US$10.9bn-equivalent of senior secured notes issued by Numericable. “It’s changed the market’s idea of what’s possible in the European leveraged debt markets,” said Ray Doody, head of acquisition leveraged finance for the EMEA region at JP Morgan, who believes that deals even bigger than the Numericable issue could already be possible. “The paradigm of acquisition finance has changed,” he said. “I believe that for the right credit in the right sector with sensible leverage, it’d be possible to raise debt packages north of US$30bn – which, when aligned with sponsor equity, could make US$40bn deals feasible.” As well as paving the way for jumbo deals in future, JP Morgan has been comfortable selling high-risk deals in niche sectors and currencies whatever the market conditions. The £610m high-yield bond package backing Hony Capital’s acquisition of UK restaurant chain Pizza Express sold at the end of July is a prime example of JP Morgan’s nimble approach to selling high-risk deals. The acquisition was one of the most highly leveraged LBOs of the year, at a whopping 6.5 times total net debt to Ebitda, and came at a tricky time for the European high-yield market. The day after the deal was announced, the European market saw its first pulled deal of the year, after investors pushed back on the structure and price of a planned bond from Winoa Group. The sterling market was particularly under pressure. June and July saw an unprecedented wave of sterling deals, with £3.4bn of new issues across 15 tranches, with the glut causing prices to tank in the secondary market. On the day the Pizza Express deal was priced, Boparan – another issuer in the food sector – saw a sterling bond offering issued less than a month before collapse to a bid of just 90.5 on the back of a newspaper expose into its hygiene standards. Yet JP Morgan was able to accelerate the Pizza Express deal’s timing, while pricing it at tight 6.625% and 8.625% yields on the secured and unsecured tranches respectively. The bonds were still well bid in early December, despite further market ruptures. The bank has also been there for some of the smallest issuers in the market – often the toughest deals to sell due to investors with heightened nerves around the liquidity of small deals. IMO Car Wash, for example, had Ebitda of just €35m when it sold €240m of bonds, while hair product company, ghd, priced a tiny £165m bond issue while having just £32m of Ebitda. JP Morgan did not shy away from the raciest structures, either. PIK bonds were thin on the ground in 2014, but the bank led some of the key deals. A €200m issue for Findus was priced just a day before the Pizza Express deal, and was one of the few that employed the more aggressive “pay if you want” structure. Days later, the bank led a €415m PIK deal for Polish mobile firm Play, the largest euro PIK to purely fund a dividend this year. This came just six months after JP Morgan led the company’s €900m-equivalent bond market debut. The deals for the Polish mobile firm are just part of the geographic spread JP Morgan has brought to the market this year. Other deals came from companies from the Czech Republic to Italy and from Spain to Finland. This is not to say it was all smooth sailing for the bank. A planned deal for Polish retailer EM&F was pulled in early August, while a sterling senior secured bond issue for KeepMoat was priced at a whopping 9.75% yield in September, well wide of its price whispers. But many in the market thought the latter would end up at double-digit yields, and the deal was sold within the underwriter’s cap rates, according to sources close to the deal. No debut sterling issuers have braved the high-yield market since it was priced, a testament to the barriers JP Morgan had to overcome to sell the deal at all. To see the digital version of the IFR Review of the Year, please click her

The past year has seen a surge of bank issuance in the US market, not only by US financials but also Yankee banks, as jurisdictions around the world finalise regulations dictating capital, leverage and liquidity ratios. Bond as well as preferred issuance in US dollars by financials (excluding self-led deals and issuing entities of corporates) had surged to more than US$415bn by November 15 2014, eclipsing what was a record US$311bn in 2013, according to Thomson Reuters data. Citigroup was at the front of the highly competitive pack of underwriters fighting for the business. Having spent years forging new relationships with banks in every corner of the world, Citigroup brought a greater diversity of bank names to US investors than anyone else. “Our FIG business is a perfect manifestation of being a global organisation,” said Peter Aherne, head of North America capital markets, syndicate and new products at Citigroup. “And the keystone of that business is our strength in corporate bond underwriting.” Societe Generale and Credit Agricole chose Citigroup for the second consecutive year for capital securities issuance, while Nordea awarded the bank with a joint lead manager role on its inaugural two-part AT1 offering of US$1bn of perpetual non-call fives and US$500m of perpetual non-call 10-year securities – the first by a Swedish bank. Citigroup was chosen by Abu Dhabi’s Al Hilal Bank to underwrite its inaugural US$500m AT1, the first for that country, as well as to bring Emirates NBD to US investors for the first time with its own US$500m AT1 – also a first for the UAE. One of Citigroup’s greatest strengths is the repeat business it receives from Australian, Japanese and Canadian banks. Highlights out of Asia included SMFG’s debut US$1.75bn Tier 2 trade, ANZ’s US$800m 4.5% 10-year subordinated Tier 2, a first for an Australian bank in the Yankee market, and a US$1bn debut by Hong Kong-based AIA. Citigroup was also active bookrunner on what became the US’s biggest REIT deal to-date – a US$3.5bn offering of three, five, 10 and 30-year fixed-rate notes by Australia’s Westfield Corp. Its close relationship with all of the Canadian and Australian majors enabled Citigroup to revive the US covered bond market as soon as basis swap changes made the US competitive with Europe. After underwriting the first US dollar covered issue for the year, a US$1.75bn five-year from Westpac, it was on every one of the five deals that followed. Citigroup also didn’t miss a step in the US market. It was used so often as an underwriter of FIG deals that few days went by when the bank was not leading a FIG trade, and sometimes several on the same day. In January, for instance, it brought Legg Mason, SunTrust Bank, Ally, PNC Bank, M&T Bank Corp and Bank of NY Mellon to the market in six consecutive trading days. The highest profile deal from a US financial was Synchrony’s US$3.6bn debut, and Citigroup was among the active bookrunners on the transaction. The BBB– rated deal came at a tricky time, but Citigroup and the other bookrunners had built such a strong shadow book ahead of the announcement that the transaction gathered orders of US$17.2bn from 250 accounts, tightened in spreads by 15bp–20bp from initial price thoughts and saw its three, five, seven and 10-year tranches tighten by 6bp–9bp on the break. Citigroup was also active bookrunner on American Express’s first-ever Tier 1 issue, of US$750m of perpetual non-call fives. The bank is also a popular port of call for alternative asset managers and PE companies. It was chosen, for example, by Apollo to be active bookrunner on its debut in the senior unsecured bond market in May with a US$500m 10-year note issue. Despite a total of US$6.6bn of issuance from four financial issuers in the market on the same day, the book grew steadily, peaked at US$22bn from more than 100 accounts and was priced at 152bp, or 10bp tighter than initial price thoughts. To see the digital version of the IFR Review of the Y

Innovative models for mutuals, mammoth multi-currency offerings and the first investment-grade CoCos all debuted during the IFR awards calendar year, but it was Lloyds’ handling of a complex capital problem that captured the attention of the market. “If there were an award for displaying superior knowledge, I think it would have to go to the Lloyds ECNs,” said a banker not even involved in the project. “The whole market was obsessed with that transaction, and in one way or another I think every house was involved, whether they were mandated or not.” Indeed, the £5bn-equivalent exchange offer for 33 ECNs across the euro, sterling and US dollar markets had been years in the making. In 2009, when the bailed-out lender first issued ECNs, it was in a dire situation, and the deal helped the bank get back on its feet by injecting much needed capital. But Lloyds understandably began weighing up its options earlier this year when it turned a profit. Given that the notes were unlikely to count towards stress test capital due to their 5% trigger – below the 5.5% required by the EBA – management decided something needed to be done. There were lots of moving parts to the offering. Retail investors had to be cashed out, while bondholders that had helped the bank when it was on its knees needed to feel they were not being short-changed. On its results call in February, Lloyds faced an anxious pack of investors desperate to know the fate of the ECNs that in some cases rewarded them with coupons of over 10%. But lead managers Lloyds, Bank of America Merrill Lynch, Goldman Sachs, Deutsche Bank and UBS ensured that by the end of the process, the bank was able to switch investors into securities with a much higher risk profile – including coupon deferrals and a higher trigger. Expert planning and discussions with accounts allowed it to upsize the transaction by £350m. The results spoke for themselves. Lloyds achieved an 81% take-up from investors keen to avoid a potential regulatory call at face value down the line. The coupons ranged from 6.375% to 7.875%, compared with the average yield of 9.3% on the ECNs. Institutional investors agreed to exchange £5bn of the ECNs for around £5.35bn of new bonds. And Lloyds issued the largest amount of Additional Tier 1 bonds ever in a single day, accounting for around a quarter of the size of the entire market at the time. To see the digital version of the IFR Review of the Year, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

Deutsche Bank, with its 40-strong team of FIG bankers, outflanked all of its rivals in the EMEA region during 2014. The numbers speak for themselves: Thomson Reuters data show the firm sold more FIG products in euros than anyone, with €22bn of deals and a 9.1% market share. The German bank carved out its own path during the year. While some focused their efforts on the burgeoning Additional Tier 1 market, Deutsche was busy pitching the broadest range of products – a strategy that paid off when clarity around total loss-absorbing capital emerged later in the year, sparking a flood of new issuance in a variety of instruments. “We are not just pitching a product, we are talking to clients about their overall capital structure,” said Gerald Podobnik, head of capital solutions. “This has become all the more important now that banks are focusing on TLAC.” Still, Deutsche had quite a task to differentiate itself from its competitors in senior unsecured and covered bonds. In Ireland, it was hired by the two largest banks to access the market but its crowning glory was the advice it offered to Bank of Ireland when it sought to repay its state aid. Deutsche helped to re-market €1.3bn of state-owned preference shares, allowing the Irish lender to break free from the clutches of a government that supported it through the financial crisis. In Iceland, Islandsbanki turned to Deutsche to help it sell the first euro-denominated bank bond since the country’s financial collapse, placing a small short-dated issue less than a week after domestic rival Arion Banki shelved plans for a larger euro deal. Islandsbanki, created after the crisis and 95% owned by Glitnir, priced a €100m two-year bond issue that offered investors a 3% coupon. In Greece, Deutsche helped Piraeus to return to the public bond market – the first from a Greek bank in more than four years – paving the way for the country’s banks to stage a return to market. The deal was a €500m three-year priced with a 5.125% yield. The order book was six times subscribed. “The whole Greek market was relying on Piraeus, whose success enabled NBG and Alpha Bank to follow on,” said Derek Mills, head of financial institutions syndicate For the more established players in the senior unsecured market, Deutsche noted a potential for spread tightening in the first quarter of 2014 and advised clients to move swiftly. It encouraged the likes of AIB, Veneto Banca, Intesa, UniCredit, BES and BBVA to pull the trigger on deals. “When it comes to the strongest FIG house I think few could argue with Deutsche,” said a banker from a rival house. “Derek Mills is considered the voice of reason and often breaks with the common view to provide caution. When the market really turns, that’s when Deutsche Bank will show its true worth.” In the capital world, 2014 was a year of Additional Tier 1, Tier 2 and insurance subordinated debt. Again, Deutsche excelled in this area, helping the likes of UBS, Swedbank, Aareal, BFCM, SEB, LBBW and Intesa to beef up their capital. In the liability management space, Deutsche helped Groupama’s refinancing of two perpetual note issues. The resulting deal (€1.1bn of perpetual non-call 10-year subordinated bonds issued in line with guidance at 6.375% in May) was the first in what turned out to be a wave of insurers looking to raise perp notes that they hope will be grandfathered as Tier 1 capital under Solvency II. “Insurance has always been the steady cousin of the banking industry but in 2014 it became a huge trend,” said Podobnik. In the Additional Tier 1 space, Nationwide and Societe Generale looked to Deutsche for help and the bank was involved in Lloyds’ mammoth exchange of its ECNs. As an issuer it also opened doors for others. Deutsche itself sold the first triple tranche AT1 offering in the primary market, selling a whopping €3.5bn equivalent to investors that placed more than €25bn of orders. “In AT1, insurance and everything else, Deutsche Bank and euros are synonymous,” said

In May, the tech giant applied the marketing magic for which it is famous to the bond market when it managed to create an aura of rarity value around a US$12bn jumbo offering. That was some feat, considering it had issued US$17bn the year before and some analysts believed Apple could issue a further US$50bn of debt to part-finance its US$90bn share buyback programme. There was also a significant number of investors that had been hurt by the performance of the US$17bn debut in 2013 – an offering that was priced to perfection but fell victim to “taper tantrum” rate volatility hitting the market almost immediately thereafter. Nevertheless, Apple whipped up a bond-buying frenzy for its new seven-tranche deal, to the point where its secondary bonds rallied by an extraordinary 7bp–10bp while it was marketing its new offering. It eventually garnered a US$41bn book, pulled in pricing from initial thoughts by 10bp–20bp and priced on top of secondary levels. “They convinced investors to buy bonds priced right on the screws. Again. It’s incredible,” said one portfolio manager at the time. The seamless deal execution was the result of a well thought-out plan of attack by Apple and its leads Goldman Sachs and Deutsche Bank, to manage expectations on size and frequency of issuance. “The thing that puts Apple’s deal apart from other well-placed large bond deals of the year is the strategy that went into setting the scene for the transaction, before the deal’s marketing process began,” said Jonny Fine, a partner at Goldman Sachs in charge of investment-grade syndicate. The plan started a week before the deal surfaced. Apple made a statement while reporting its first-quarter earnings that it was looking to do another debt offering, but one that while similar in size to its 2013 trade would not necessarily be only in dollars. To get the bookbuilding process off at a furious pace, leads told investors to think of an US$8bn–$10bn size. The smartest execution move of all was the decision to cap the size of its 30-year tranche to US$1bn, a move that substantially increased the pricing tension in the book. Orders poured in and secondary spreads of Apple started to rally, to the point where its outstanding 2043s traded inside their original 100bp new issue spread for the first time all year. Like its first deal, aftermarket performance was picture-perfect for the issuer, with the tranches tightening from 1bp–5bp in the aftermarket. To see the digital version of the IFR Review of the Year, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

When Altice and Numericable priced a US$16.7bn high-yield bond package in April 2014, it vindicated Goldman Sachs’ decision half a decade ago to pour resources into the then niche European high-yield market. Europe had always seemed trivial in high-yield compared with the enormous US market. Whereas Michael Milken made “junk bonds” sexy in the US in the 1980s, it remained a taboo phrase for European corporate treasurers for decades. And yet here were two French companies raising a record-breaking amount of high-yield bonds to buy another French company. “There are many great things about the deal, but perhaps the greatest thing is that even a few years ago no one would have thought that the largest high-yield bond deal of all time would come out of Europe,” said Denis Coleman, who moved over from Goldman’s US leveraged finance team in 2009 to head the EMEA credit finance team. Goldman was a global co-ordinator on the Numericable bonds and loans, but was entrusted with the lead-left role on the most difficult piece of the puzzle: the US$5.8bn-equivalent Altice bonds. When the deal was announced, many said it would have to come north of 8%. And yet the bonds were eventually priced at 7.75% on the US dollar tranche and just 7.25% on the euro piece. But while Altice and Numericable was a gargantuan deal, Goldman’s coveted lead-left role was born out of the bank’s focus on small companies. Altice’s founder Patrick Drahi built the business from scratch by cherry-picking assets across the globe and then consolidating them to achieve synergies. Goldman Sachs was there from day one. Head of EMEA leveraged finance origination Littleton Glover recalls that a request to sign a €10m relationship loan to a Drahi Portuguese business in 2012 raised a few eyebrows internally. “The initial response was: ‘We’re Goldman, we don’t do €10m loans.’ But I was insistent: ‘This is a client that needs a €10m loan now, but will need billions of dollars of capital in a few years.’” The loan was signed and Glover’s foresight paid off. While the Altice and Numericable deals were stereotypical high-yield issues – financing a big cable M&A trade – Goldman has arguably done more than any other to broaden the scope of European high-yield. Its deals in 2014 included a French jeweller, a Belgian burger restaurant and a Swiss vending machine operator. Bonds from smaller niche firms are more susceptible to idiosyncratic risks, as seen in dramatic fashion in September when Phones 4U went into administration almost a year to the day after Goldman sold a deeply subordinated payment-in-kind bond. But Goldman has brought these deals to respond to investors crying out for the opportunity to diversify their portfolios away from large industrial firms. And for companies that have no prior experience of high-yield, the Goldman approach makes all the difference. “I was very impressed by Goldman Sachs,” said the CEO of one borrower the bank brought to the high-yield market this year. “As a small company you’d expect to be low down on the priority list of a large US investment bank, and yet we were never made to feel like a small customer.” Goldman also put its money where its mouth is, underwriting some of the boldest M&A trades in Europe. Another notable trade was the Goldman-led €1.45bn-equivalent bond package backing the buyout of Norwegian debt purchaser Lindorff. Running the deal in the dying days before the August break was a brave call, but a nasty dose of volatility made the syndication even more nerveracking. “For the first time all year, the market was falling away from us as we were running the deal,” said Mike Marsh, head of EMEA leverage finance capital markets. Goldman helped establish the debt purchasing sector in the high-yield market with its deal for Arrow Global last year, but the market had only ever bought senior secured deals from UK firms. A nimble approach allowed Goldman to sell Lindorff in a challenging market, adding a Swedish kroner tranche

Feeding the love affair with environmentally friendly debt, the supranational upped the size of its July 2019 transaction to €1.5bn from the originally intended €500m–€1bn on the back of a €2.65bn book, making it the largest single-tranche Green bond sold. The deal also highlighted a shift in KfW’s funding strategy. Until this point, the agency had relied on its green issuer status, as much of its promotional lending businesses are linked to socially responsible projects. In addition to size, however, the bond issue brought something new to the Green bond universe: transparency and heightened levels of disclosure. It was the first such deal with an independent third-party assessment of environmental impacts, which will be reviewed by the independent Center for Solar Energy and Hydrogen Research, Baden-Wuerttemberg; while KfW’s Green bond “concept” will be reviewed and evaluated by independent research centre CICERO. “KfW was able to wait and bring something innovative and additive to the market, instead of bringing something that had already been done,” said a banker. Proceeds will be used to fund a programme that provides low-interest financing for renewable energy power projects. The issue followed the trend of previous Green bonds and was priced in line with the issuer’s vanilla curve. It came at 16bp through mid-swaps, in line with guidance of less 15bp area announced by lead managers CA-CIB, Deutsche Bank and SEB. One lead placed fair value at 16bp through swaps, meaning no new issue premium. “The structure of the book was impressive. With over 90 investors, we achieved good granularity and small ticket sizes of around €30m,” said Petra Wehlert, head of new issue public bonds at KfW. Indeed, at just 16.7% allocated to banks and 18.8% to central banks, the Green issue was light on the two groups that usually take large chunks of KfW’s benchmarks. Not surprisingly, fund managers were very well represented, accounting for over half of the book at 50.3%, while pension funds took 11.1% and corporates 8.1%. “KfW’s goal was to have everyone involved, both Green investors and its traditional non-Green investor base,” said a syndicate official involved. “The new Green bond will support the development of the market. With the size, we are able to provide more liquidity to the market and it gave us the opportunity to talk to new investors,” said Horst Seissinger, head of capital markets at KfW. Indeed, the success of the issue paved the way for a US$1.5bn five-year follow-on offering in October. “We wanted to take Green bonds out of the niche and into the broader market,” said Wehlert. To see the digital version of the IFR Review of the Year, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

By the time Nationwide emerged in March (via Citigroup, Deutsche Bank, RBS and UBS) with its £1bn 6.875% perpetual, investors were prepared. Many of them had been thoroughly educated in Nationwide’s business model the previous November when it set out to sell the first core capital deferred shares, an instrument that would provide the backing to the AT1. Both the £500m CCDS and the £1bn AT1 help the issuer meet demands from the Prudential Regulatory Authority that it beef up its leverage ratio ahead of the 2019 Basel deadline. Nationwide followed in the footsteps of European banks such as UBS, Barclays, Societe Generale and BBVA that all raised this kind of subordinated debt to beef up their capital bases, although this was the first time a financial has diversified into the sterling market. So, for the UK market the Nationwide deal set a benchmark. “This is an incredible result for Nationwide but also it shows the depth of demand the sterling market can offer, which up until now had been seen as a niche currency for AT1 issuance,” said Gordon Taylor, head of financial institutions DCM at RBS. Following Nationwide’s triumph, domestic names such as Lloyds and Virgin Money followed suit. But more importantly, European names including Deutsche Bank and Credit Agricole saw a new pocket of demand to fulfil their multi-billion AT1 needs. The pricing on the 6.875% contingent capital bond issue impressed many. Coming some 10bp–15bp inside where euro and US dollar offerings would have come, it made sterling look not only like a strong diversification play but a competitive alternative to rival markets. The £11bn book also surpassed the issuer’s expectations and highlighted the deep pockets of investors and the quantum of accounts that could take part in such an offering. “I didn’t even know there were 500 sterling investors that could buy the trade,” said Andy Townsend, treasurer at Nationwide. That wide investor base also caught the attention of other mutuals. Coventry Building Society went a step further than Nationwide in June and raised AT1 debt that converts into something that does not yet exist. Coventry priced a £400m perpetual non-call 5.5-year issue that converts into CCDS if its Common Equity Tier 1 ratio falls below 7%. However, unlike Nationwide, which issued CCDS before going to the AT1 market, Coventry skipped that stage. To see the digital version of the IFR Review of the Year, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.