Facing down twin threats
BP was faced in 2020 with the pandemic and a collapse in oil prices. It responded through an ambitious strategy that included a ground-breaking credit facility and a record-breaking hybrid bond. Those deals meant that it shored up its liquidity and balance sheet against any further threats. BP is IFR’s Corporate Issuer of the Year, while its US$11.9bn-equivalent five-tranche hybrid is Europe Investment-Grade Corporate Bond of the Year.
As if a pandemic and government-enforced lockdowns weren’t big enough challenges last March, oil companies also had to contend with a free-fall in crude prices following a spat between Saudi Arabia and Russia.
Suddenly, liquidity, balance sheet and credit ratings all became pressure points for producers. At BP, where Bernard Looney took over as chief executive only the previous month, the funding team kept calm and used their experience of previous crises to draw up a strategy to ease each concern. What unfolded over the next few months were transactions in the loan and bond markets that redefined what was possible – and what was needed – to steady the ship.
“We have been buffeted by events, but what has helped us is the work we have done in the past, making sure all of our processes are in place to access the market quickly and when we need to," said Gary Admans, head of liquidity and capital markets at BP.
"Our funding isn't like a lot of other corporates in the sense that it is very responsive to the price of oil. You could say that the Covid pandemic and what happened to oil was a very extreme version of a normal year rather than something completely different."
Indeed, the start to the year had been normal enough, with BP issuing a US$1.25bn 30-year bond in mid-February. A few weeks later, though, BP’s world turned upside down.
As financial markets went into meltdown, the first step the company took was to shore up its liquidity. It did so through a market-defining US$10bn two-year credit facility that was not only a debut corporate syndicated loan for the company but also the first multi-billion liquidity facility underwritten during the Covid-19 crisis. It helped to reassure borrowers that the loan market remained open and that lenders were still willing to underwrite syndicated loans in the pandemic.
The facility was put in place to provide additional liquidity headroom in the twin crises BP was facing.
"We were the first corporate to have a large facility in place following the crisis and the fact BNP Paribas brought the deal meant that we were able to have guaranteed liquidity in place quickly, which then made everything else easier," said Admans.
The financing was on top of BP’s US$7.625bn of undrawn bilateral standby facilities from a group of 25 international banks that were available up to the first half of 2022.
The loan was underwritten by BNP Paribas on March 13, just five days after first discussions had started, as BP moved quickly to respond to any potential short-term market illiquidity and short-term price volatility.
A diversified group of BP’s relationship banks was approached as the deal was launched on March 17 and, despite draconian lockdowns across Europe and a worsening outlook, syndication was smooth, closing oversubscribed just two weeks from launch with 19 banks signing on to the financing on April 1 alongside BNP Paribas.
Art of the possible
The amount raised in such a short timeframe during a period of significant market uncertainty and rapidly rising bond and loan pricing made the deal a textbook exampleof the art of the possible.
With the crisis causing rapid and often unclear changes in bank behaviour, the financing calmed fears of a wider loan market shutdown and provided a precedent for the subsequent raft of additional liquidity facilities raised by European investment-grade borrowers during the fraught few months of the virus outbreak.
“This was a ball that was going to roll and keep on rolling,” said Charlotte Conlan, head of loan syndicate and deputy head of leveraged finance capital markets at BNPP.
Time for bonds
With the credit facility in place, BP then took to the bond markets. On April 2, it went to the US dollar and euro markets, selling a US$3.25bn four-tranche deal and a €3.25bn triple-trancher. BP was one among a number of oil companies in the bond markets after they reopened.
With liquidity and funding in place, BP set about bullet-proofing its balance sheet. It did so in spectacular style when in June, the company sold the largest ever hybrid bond through its inaugural issue in the product.
It raised US$11.9bn-equivalent across euro, sterling and US dollar markets over five tranches, issuing €4.75bn, £1.25bn and US$5bn respectively.
Not only did the deal, which is IFR’s Europe Investment-Grade Corporate Bond, mark the largest ever multi-currency hybrid offering, it was also the largest dual-tranche euro hybrid recorded in more than five years and the largest sterling hybrid ever.
The company was able to take advantage of the turnaround in sentiment towards risk assets following the US Federal Reserve's announcement that it would buy corporate bonds directly (rather than via ETFs) in secondary markets.
And while BP wasn’t the first corporate in the euro hybrid market following the Covid-19 outbreak, it was by far the most ambitious as it knew it would have to issue in size to have any impact on its large balance sheet.
BP was facing a significant erosion of equity and increased gearing caused by a US$13bn–$17.5bn post-tax impairment and write-off following a reduction in its oil price outlook. With 50% equity credit, the hybrid helped to support the company's credit metrics as it executed a €15bn asset disposal programme.
"The hybrids clearly weren't driven by liquidity – we had issued bonds and we had the facility – but it was about protecting the balance sheet and about maintaining our strong investment-grade rating,” said Admans. “But this shouldn't be looked at in isolation. It was part of a number of measures that included cutting the dividend by 50%."
After engaging with more than 140 investors, BP took the decision to execute its full suite of proposed tranches for the deal: a perpetual non-call six and perpetual non-call nine in euros; a perpetual non-call seven in sterling; and a perpetual non-call 5.25 and perpetual non-call 10 in US dollars.
This allowed the company to attain better pricing by not overloading a single market while spreading its maturities and diversifying its investor base.
The euro tranches were each €2.5bn. Combined books were nearly €16bn. Yields were set at 3.25% for the non-call six and 3.625% for the non-call nine.
The £1.25bn tranche, meanwhile, priced at 4.25% off a £4bn book.
The US dollar bonds were US$2.5bn each and priced at 4.375% for the non-call 5.25 and 4.875% for the non-call 10.
One of the most impressive achievements for BP last year was that it maintained its A1/A–/A ratings throughout the crises and the hybrids were an important factor in that.
In the second half of year there was less pressure in funding markets. BP returned to the US dollar market in August with a US$2.5bn dual-tranche offering comprising 10 and 30-year notes. A final dollar deal was done in December, another 30-year print for US$1.5bn.
In Europe, BP achieved another first for itself when in December it issued a debut bond from BP Capital Markets, a newly established borrowing entity domiciled in the Netherlands and eligible for the ECB’s asset purchase programmes.
"During previous years we hadn't seen the [pricing] benefit of issuing ECB-eligible bonds and banks have actually told us there wouldn't have been much benefit. But [in 2020], following April, the advantages of issuing [ECB-eligible] bonds became very apparent," said Admans.
The €750m 2040 note was also the first instance of the company issuing a 20-year bond in the euro market and underscored its greater focus on longer-dated funding.