| Headline: The landmark deals of 2001 Regional: Deals of the year 2001: Western Europe Deals of the year 2001: Central & eastern Europe Deals of the year: North America Deals of the year 2001: Latin America Deals of the year 2001: Asia US Best corporate bond Winner:Kellogg Date: March 23 2001 Amount: $4.6 billion Underwriters: Citigroup (global coordinator); JPMorgan (Joint books) Everybody knows Kellogg. The Kellogg’s brand’s dominance of the breakfast cereal market makes it one of the best known in the US. And that made for more enjoyable roadshow meetings for the firm’s multi-tranche debt deal than might have been the case for firms with less snap, crackle and pop. “Meetings would start with investors saying things such as ‘I remember being a kid and eating frosted flakes...’ rather than jumping straight into cashflow analysis,” says Maurice Lopez, director in debt capital markets for Citigroup, global coordinator for the deal. But Kellogg also had its problems. To be more precise, it had in recent months suffered a six-notch downgrade, placing it on a triple-B rating, perilously close to sub-investment-grade status. And that, brand or no brand, was not good news for investors, who were concerned that Kellogg might be in for further downgrades. At any other time that would not have been a major concern for the company’s CFO, Tom Webb. Kellogg had not, up to March last year, been a large borrower in the capital markets, which is somewhat unusual for a 95-year-old US company of its size. But in October 2000 Kellogg announced that it was to buy a rival, Keebler, and would pay $42 a share, as well as assuming all Keebler’s debts. That priced the acquisition at about $4.5 billion, and the company intended to pay for it using short-term and long-term debt. That would not be a straightforward task now that it was a triple-B company with more downgrades possible. That is where the company’s brand looked set to prove so useful, if marketed properly. And that is what Webb and his team, with lead bankers Citigroup and JPMorgan, managed to do. “Every single investor knew the company very well,” says Lopez. “But getting the management team in front of them was crucial to making sure the investors could confirm what they believed. Kellogg has professional, focused managers, great assets, and great cashflow.” Combined with Keebler, the company brings in just under $10 billion in revenues each year. Investors were impressed. The banks managed to drum up $17 billion in orders, nearly four times as much as what the company was to raise, and received orders from 340 accounts. Not only did Kellogg manage to raise all the money it needed, it also created a yield curve for itself, as well as establishing a benchmark for the consumer products sector and for triple-B credits. There were four tranches: a $1 billion two-year tranche, a $1 billion portion due in 2006, a 10-year issue of $1.5 billion, and a $1.1 billion 30-year tranche. It’s one of the most liquid and traded bonds in the market, and its paper was among the first to be traded following the attacks of September 11. Antony Currie Best convertible bond (joint winners) The US convertible bond market had an incredible year in 2001. Issuance hit record levels, with over $104 billion raised – 60% more than in 2000, which was also a record year. Convertibles accounted for half of all equity issuance in the US, the highest proportion the market has ever achieved. The basic reasons were pretty straightforward: interest rates were dropping, equity volatility was high, and the commercial paper market was closed to all but the highest-rated issuers, making converts a valid alternative. Deal structures also helped, creating deals with high conversion premiums and no yield that lured in hedge funds wanting to trade on the volatility. In such an environment picking a winner was not easy. So we picked two. One, Intel, won because of its unique aim and structure. The other, Calpine, won in large part because of its success in the face of adversity.
Date: April 24 2001 Amount: $213 million Underwriters: Lehman Brothers Intel is an infrequent visitor to the capital markets. Its last deal – debt or equity – was in 1993, and that was a call warrant. But its foray into the convertible bond market last year had nothing to do with the reasons espoused by other issuers. With its triple-A rating, Intel could still access the commercial paper market, and it had no need to raise cheap capital to pay back or pay off other, more expensive capital as it has not raised any in years. Instead, Intel used the favourable convertible bond market conditions to monetize a holding it had in another company, and to do so in a tax-efficient manner. In February 1999 Intel bought $100 million-worth of convertible bonds issued by Samsung Electronics. Several other corporates had done the same, and some had already sold their holdings – such as Texas Instruments, which simply sold them in the open market. But Intel’s holdings had appreciated so much that it was concerned about capital gains tax. The Samsung paper had a fixed conversion price of $92.47 a share; on April 23, the day before Intel launched its convertible, Samsung’s stock price closed at the US-equivalent price of $167.90. “Intel wanted to continue to own Samsung’s paper, but also wanted to get the benefits of the stock increase,” says Larry Wieseneck, head of US equity capital markets at sole lead manager Lehman Brothers. “More value could be created if Intel sold a structure off its own balance sheet than by simply selling its Samsung holding. So we created a security which allowed investors to exchange the Intel convert into Samsung shares.” It’s the first time that a security has been structured to be exchanged into another company’s shares, and it is also the first-ever negative yield-to-maturity deal launched in the US. The paper was sold at 106.5% of par value, but investors will only receive par back – the point of the deal is to monetize the company’s holding in Samsung, not to pay investors a coupon. Investors jumped at the deal because the upside – getting Samsung stock – is very favourable with a below-average conversion premium of 17.3%; they can exchange the paper once Samsung’s stock reaches the US equivalent price of $184.94. It took two hours to sell the deal, and it generated $2 billion in demand – Intel is a rare issuer, and is even more of a rarity in being a triple-A credit in a sector where average credits predominate. “Investors came out of the woodwork to buy this deal,” says Wieseneck, “It’s a museum piece.” AC Joint Winner: Calpine Date: December 19 2001 Amount: $1 billion ($1.2 billion after greenshoe exercised) Underwriters: Deutsche Bank Calpine was hit hard by the collapse of Enron. Analysts and investors regarded it as more likely than most of its competitors to be dragged down by the scandal and in mid-December Moody’s reversed its decision of a few months earlier and downgraded the company to junk-bond status. The fear was that it would be unable to raise any more capital for the foreseeable future. And there was the problem. In April 2001 Calpine was one of many companies that took advantage of the surge in convertible issuance by launching its own deal, and it used a new structure that was much in play last year: the zero-coupon, zero-yield-to-maturity structure. This structure usually carries a high conversion premium, making it attractive to none bar hedge funds that like to trade the volatility. As insurance, almost all zero-zeros have a one-year put option. Nothing wrong there, assuming the issuers are aware that the bond can be put back. But for Calpine it became a disaster waiting to happen. Its April issue was trading at enormously high yields – well over 20% at one point – as the price of the bond fell dramatically, and it was an easy bet that investors would put the bonds back. But Calpine lacked the funds to buy the issue back, and had just been downgraded by Moody’s Investors Service on fears that it might be unable to raise any more capital. The potential for bankruptcy was increasing. In stepped Deutsche Bank, with its new head of convertibles, Brooks Harris – he had joined from Morgan Stanley in September. The bank had hardly done any business with Calpine before – Goldman Sachs and Credit Suisse First Boston are the company’s regular bankers – nor did it have any loans out to the firm. But within two weeks of presenting some ideas to the firm, Harris and his team had successfully marketed a $1 billion convertible – increased from $400 million – which more than covers the convert expected to be put back in April. What’s more, Calpine’s stock rose 5% on the day, and is up over 15% since the deal was launched. Within 24 hours three other energy companies – Mirant, Dynegy and El Paso – all managed to execute common stock block trades to improve their capital position. “There’s no doubt that we all benefited from Calpine’s deal being a success,” says a senior equity capital markets banker involved in one of the block trades. AC Best M&A deal Winner: Barrett Resources Type of deal: Defence against Shell, and subsequent sale to Williams Amount: $2.7 billion Date: March-June 2001 Adviser:Goldman Sachs Runner up: Echostar Type of deal: competed acquisition of Hughes, a division of General Motors Date: October 2001 Amount: $2.7 billion Advisers:Deutsche Bank, UBS Warburg Last year might have been a bad year for M&A deals as far as quantity was concerned but there was no shortage of drama in those that did take place. There were two hard-fought and at times acrimonious financial sector deals, for example. AIG wrested control of American General from the UK’s Prudential, and Wachovia and SunTrust battled it out to merge with First Union (Wachovia won). The battle between NewsCorp and Echostar for Hughes, a unit of General Motors, was another nerve-biting deal, and is this year’s runner-up. This year’s winner, though, is awarded to a deal in which foresight, planning and meticulous execution helped win the best deal for shareholders. It started on March 1 last year, when Shell, unsolicited, delivered a letter to Barrett Resources saying that it was preparing to offer $55 a share in cash to buy the company. It went public with the offer six days later. The next day, the Barrett board all but rejected the offer, declaring that it would explore ways to maximize shareholder value, including selling the company. The CEO, Peter Dee, called in his long-time advisers at Goldman Sachs. Its bankers had been on a defence retainer since 1997, carefully planning a strategy for how to cope with a hostile offer. Goldman prepared quarterly reports for the board, as well as an annual review just before the annual board meeting. That was due in March, so Goldman had spent several days with the company towards the end of February. The bankers and Barrett executives could not have been better prepared. But it was not, on the face of it, an easy task to put up a defence against Shell: its market capitalization was nearly 100 times as large as that of Barrett, and it had a cash balance of $14 billion – more than enough to swallow up Barrett for around $2 billion. The board quickly decided, however, that just defending would not be enough. “The board was very realistic,” says Ray Strong, a managing director in Goldman Sachs’s M&A team. “They knew that a public hostile bid would probably lead to the company being sold, and that it would be difficult, and probably ill-advised, to fight Shell and not sell to another firm.” So on March 8 the board effectively rejected Shell’s offer, stating that it would seek ways to enhance shareholder value, including a sale of the company. The formal rejection came on March 23 when the Barrett board described Shell’s offer as inadequate. It was a bold move. “We were concerned initially that other potential bidders might be warded off by a large player such as Shell making a bid,” says Goldman’s Strong. Quite the opposite happened, though: 45 companies contacted Goldman Sachs and Barrett, 12 signed confidentiality agreements, and nine visited Barrett’s data room by April 20. That was when Shell’s tender offer was due to expire; it had already extended its offer from April 6, extended it to May 4 on April 20, and on April 26 increased its offer to $60 a share. Barrett rejected that on April 30, stating that Shell had until May 2 to submit its final proposal – as was the case for any other parties. A moment of farce followed: Williams Companies announced that it was going to bid for Barrett. But its announcement came into the public domain via a rather unusual route. On May 1 it was to host a conference call with analysts to discuss its first-quarter earnings. Instead, analysts were put through to another call linking up Williams’s board of directors, who were discussing making an offer for Barrett. Meanwhile, Shell stuck to its $60 a share offer, though it said it was negotiable. Less than a week later, on May 7, it pulled out. Williams had made an offer to buy the company for an implied price of $73.32 a share: a cash offer of $73 a share for half of the shares, and an exchange ratio of one Barrett share for 1.767 Williams shares for the other half. That got investors a 61% premium to the stock price the day before Shell’s public announcement of intent, a 33% premium to Shell’s initial offer, and a 28% premium to Barrett’s 52-week high. AC Best securitization Deal Winner: UBS Warburg Principal Finance Type of deal: CDO of CDOs Date: December 13 2001 Amount: $236.95 million Underwriters: Société Générale Simplicity is not commonly associated with collateralized debt obligations. CDO deals are often opaque, information about the securities used in deals is hard to come by and buyers are often unaware of the inherent risk of what they have bought. American Express, for example, took a charge of $826 million last July, with poorly performing CDOs being responsible for most of that and several other US banks announced smaller losses. If CDOs are complex and misunderstood, CDOs of CDOs are even more so. But one firm has gone a long way to open up this arcane world. Last December, the principal finance department of UBS Warburg issued its first CDO of CDOs. The $236.95 million deal is the first such transaction that is wholly sub-investment grade – most investors are usually more interested in the equity or investment-grade tranches. A wholly BB-rated transaction structured by a new player made investors nervous, so UBS and its bankers at Société Générale offset this by abandoning the usual structures for CDOs. They allowed investors to know absolutely everything about the deal. First, its objectives are straightforward. It’s not attempting to get loans or bonds off the balance sheet and is not trying to raise money for the issuer, as an increasing number of straight CDOs do. “Our focus is on value, not management,” says Michael Barnes, head of structured credit arbitrage at UBS Warburg. “And the value is in choosing the right assets to start with which take advantage of the difference between the BB rating of the underlyings and their actual spread.” As a result, the deal is the first static CDO of CDOs – aside from weeding out defaults, Barnes and his team cannot tinker with the portfolio at all – and what was put in at the start of the deal is what will stay there for its lifetime. As a result UBS takes just a five basis point service fee, no management fee. “The usual approach in CDOs of CDOs has been for the managers to rely on investors to trust their judgement on what goes in the portfolio,” says Lisa Underwood, head of the CDO group at underwriter Société Générale. “The UBS deal, however, is fully transparent from the start.” So investors know the composition of the deal (for example, 90.66% of it is CDO securities, the rest Reits, asset-backed and commercial mortgage securitization deals), how much is emerging markets ($46.7 million), all the ratings, whose deals – by manager and underwriter – are in the portfolio, and what percentage. The genesis of the deal dates back to the end of 2000, but the hard work didn’t really start until Barnes and his team started to shop around for the CDO assets to put into the deal. That started in July, and took four months to complete – the September 11 attacks set the deal back by about a month. AC Best risk management Deal Winner: FleetBoston Date: June 2001 Notional Amount: $40 billion Bank: Deutsche Bank FleetBoston was facing a dilemma. The New England-based bank had agreed to sell its mortgage unit, Fleet Mortgage Corp, to Washington Mutual, and the deal was due to close at the start of June. In itself that was no bad thing. The dilemma was caused by Washington Mutual deciding mostly to use its own hedges on the portfolio, and not to buy all those that Fleet had put in place over time. Looking forward to the closing, it expected to have interest-rate derivatives in place with a notional value of over $32 billion, $29 billion of which were interest-rate options such as constant-maturity swap floors (CMS) and caps, and swaptions. These were perfect for hedging a mortgage portfolio, but not for the business mix Fleet would have after the sale. For this, Libor floors were better suited. “The mortgage servicing rights (MSR) would trade at a price determined at 3pm on May 30 based on where interest rates were at the time,” explains FleetBoston’s asset liability manager Joe Dewhirst. “Any risk of changes to the MSR before then would be borne by Fleet, after which it would transfer to Washington Mutual. We needed to have the existing hedges in place until 3pm, but not a moment longer.” And that was the problem. Unwinding $32 billion in hedges as soon as the portfolio passed to the new owners was no easy task. The fact that the hedges had been put in place using several counterparties made it even more difficult. “It would be impossible to keep such a large liquidation quiet,” says Dewhirst. “And a slower, more orderly sale also had its risks. If we did it before the sale of the assets, we’d be underhedged; if we did it afterwards, we be exposed to increased market risk by having hedges without the hedged item.” But in the risk, Fleet’s treasury team saw an opportunity. While Fleet’s margin had been well hedged through 2000, like most regional banks Fleet would have suffered some margin compression if short term interest rates resumed a sharp decline. At the time, market consensus suggested that economic recovery was imminent and the Fed was near the end of its programme of monetary easing but treasurer Doug Jacobs and his team held what at the time was a contrary view that interest rates were likely to continue to fall. “One way to hedge that risk is with offsetting positions in debt securities or interest rate swaps,” says Dewhirst. “But interest rate options are an excellent tool and Libor floors suit our Libor-based loan products. As of 3pm on May 30, then, FleetBoston would have a completely mismatched hedging position. The solution was to find one counterparty to exchange the CMS floors and caps and swaptions that Fleet no longer need to hedge MSRs for Libor floors that would hedge interest income. This was done in several steps over the course of the week leading up to the handover of the mortgage company (all figures are notional amounts). First, Fleet terminated about $5 billion of swaps and options with Deutsche and assigned $8 billion in swaps and options from other counterparties to Deutsche. Fleet also set aside $5 billion of hedges to deliver to Washington Mutual and $1 billion to terminate with other counterparties. Then came the two-part core trade. In the first part, Fleet sold $14 billion in options to Deutsche Bank offsetting mortgage company hedges with other counterparties. “We’re holding the matched position in a trading book and are gradually managing the position down,” says Dewhirst. For the second part Fleet bought $12 billion five-year one-month and three-month Libor floors from Deutsche Bank with strikes at or near the money. That latter trade turned out to be well conceived as interest rates declined sharply. “In August and September we decided to sell floors longer than one and a half years,” says Dewhirst. “And we lowered the strikes on what was left. That took out all the money we had put into the trade, as well as realizing an extra 20% to 25%. Having strikes at the money on the one year floors we had left was a good insurance policy. If the Fed raised interest rates, we’d have lost nothing. But it lowered rates very aggressively after September 11, leaving us with a very large unrealized gain. As that hedge gain flows into income, it’s helping us stabilize net interest margin.” The process was a success both for Fleet and for Deutsche Bank. Fleet managed quietly and without any market disruption to alter a very large hedging portfolio to suit its needs, and make some money along the way. Meanwhile Deutsche has proved that it is a top player in the derivatives market in the US, being the sole bank to work on what its bankers and Fleet estimate to be the largest deal of its kind. Its bankers, led by head of US fixed-income derivatives trading Jon Kinol and head of fixed income derivatives sales Suzanne Cain, put together a well-structured deal, were willing and able to take on the risk with all Fleet’s derivatives counterparties, and, crucially, kept the deal quiet. “The market was totally unruffled by the trades,” says Dewhirst. “There were rumours about what we were up to before May 30, but they talked of a deal smaller in magnitude than what we were planning. Then in the months after the deal we had people ringing us up asking us what had happened to all the trades they expected to see.” Its success only came to light when the two firms went public with the deal in December, six months after it was constructed. AC Best equity issue Winner: AT&T Type of deal: Debt-for-equity swap and S&P index - addition block trade Date: July 6 2001 Amount: $1.6 billion Underwriters: Goldman Sachs, Credit Suisse First Boston There are a couple of unwritten rules in the US equity market. “You don’t do a deal on a Friday, and you never do a deal on the Friday after the July 4 holiday,” says Peter Blanton, a managing director in US equity capital markets for Credit Suisse First Boston. Yet Friday July 6 was the date chosen by CSFB and Goldman Sachs to launch a $1.6 billion block trade for AT&T Wireless. It wasn’t a run-of-the mill block trade. This was a key move in the complex carve-out of AT&T Wireless from parent AT&T. The process had started in April 2000 with a $10.6 billion carve-out of part of the wireless division to become a tracking stock – meaning that all voting rights stayed with AT&T. In May 2001, AT&T offloaded more AT&T Wireless tracking stock: the company approached some of its major shareholders and exchanged roughly $7 billion of AT&T stock they held for AT&T Wireless stock. Nearly 30% of AT&T Wireless stock had now been spun off, with another, larger, exchange scheduled for July. But AT&T also wanted to monetize some of its remaining holdings to pay down debt. That, however, would incur a tax charge, so Goldman Sachs decided to use a debt-for-equity exchange. “This was a product we had developed in our new products group some months before,” says Stephen Pierce, managing director in equity capital markets at Goldman Sachs. “We had already showed it to Lucent, which used it for part of its spin-off of Agere.” Morgan Stanley led that transaction in March 2001. Goldman acted as the middleman, buying up AT&T debt in the market place in the run-up to the July block trade. To comply with SEC rules, all the debt to be used in the exchange had to have been bought at least 15 days before the block trade. In all, Goldman bought $1.6 billion of debt, and then exchanged it with AT&T for 94.5 million AT&T Wireless shares worth the same amount, plus additional stock to pay for the underwriters’ discount. The next trick was how to sell those shares to the public. In the Agere transaction, Morgan Stanley issued a $519 million greenshoe after the spin-off. Though this left the issuer and underwriter content, investors were not so convinced by the method. It was new, had not been explained to them properly, in part because of regulatory reasons, and formed part of a deal that had already been downsized to one-third of initial indications for a company known to be desperate to get the deal done. So Goldman and CSFB took a different route. “We decided to tap the demand which we knew would come from index funds,” says Pierce. “On the day we chose to do the exchange, all outstanding AT&T Wireless tracking stock was to be converted into a regular asset stock, and given its market cap we were pretty sure that AT&T Wireless would be put into the S&P500 index. That would create a one-off demand from indexers.” That’s where the opportunity lay. “Usually index funds hold about 8% to 9% of any company in the S&P500,” says Blanton. “But they only held about half of that in AT&T Wireless because AT&T and NTT DoCoMo still owned a good portion of the stock.” And that was what determined the timing of the deal. On Monday July 9, AT&T was to exchange a significant chunk of its holdings in its wireless spin-off with shareholders of AT&T stock. That exchange was to include 1.135 billion shares, valued at $19.5 billion – roughly 48% of the company. AT&T would still hold about 7%, and NTT about 16% of the wireless unit, but the large exchange provided a great opportunity for AT&T to monetize a small part of its holding and pay down some debt, at the same time as giving index funds the chance to stock up. AT&T and the banks had already given notice of their intent weeks beforehand. “We said in the registration statement we filed in May that we would be selling to index funds,” says Blanton. “But we also had to reassure the S&P inclusion group that we weren’t forcing their hand, as they never give any formal indication that far in advance of which stocks will be included in the index.” That confirmation only came closer to the deal’s launch. In all, 53 index accounts were contacted by the banks, with the top-four funds accounting for two-thirds of the allocations. The block trade was sold at $17.05, offering a 10 cent discount to the closing price the night before. “There was a significant supply of stock but with the slight discount we sold it in a very short period of time,” says Pierce. “The indexers had excess demand and had to satisfy their demand in the open market. That helped push the price of the stock up 3.5% on the day of the offering.” AC Best loan Winner: Lucent Technologies Amount: $6.5 billion Lead arrangers: Citigroup, JPMorgan Date: February 2001 “There were plenty of bumps along the road to getting this deal completed,” says Chad Leat, global head of loans at Citigroup, when discussing Lucent Technologies’ $6.5 billion loan package. “Not least of these was to find so many details on the front pages of the papers, and on TV.” To focus so much attention on a loan deal was almost unheard of. But the continuing tribulations springing from Lucent’s financial quagmire were almost fantastical. The problem revolved around renewing the company’s 364-day loan facility, which was falling due in February. By the end of 2000, though, a fight for the company’s survival had begun. A former darling of the telecommunications sector, Lucent was now facing a multitude of problems. By October 2000 its stock price had fallen to $20 from a high of $83 less than a year earlier. The odd rally aside, it would continue to slide to single digits, where it still is today. It was also that month that there was a shake-up in senior management, with Henry Schacht being lured back to become CEO (he had left to run a Lucent spin-off) and speed up the restructuring of the company. That essentially meant spinning off all non-core businesses. But former excess was coming back to haunt the new management team. One growing concern was the amount of capital Lucent had used to loan to smaller companies to enable them to pay for Lucent equipment. This vendor debt was at such high levels that Lucent had effectively become a venture capital firm. A high proportion of the billions lent out went to new companies that were now beginning to retrench or close, often without even buying the equipment, let alone paying back the loans. In January, Lucent released its results: revenues had fallen by more than half those of the year earlier, to $3.5 billion. And the company announced a restructuring charge of between $1.2 billion and $1.6 billion. Lucent had mounting debts, poor cashflow, management in transition, and was now also being downgraded, further confirming its inability to tap the commercial paper market. That was a huge blow. “The company had several challenges facing its business,” says Leat at Citigroup. “And on the financing side, the main one was its overreliance on short-term debt.” Within the following month, charges of accounting irregularities would also be levelled, and rumours of impending bankruptcy started to do the rounds. It looked as if Lucent didn’t even have enough cash to follow through with its restructuring plans. It was a time for cool heads. “The situation was more complex and the magnitude of the ebitda swings were larger than we expected when we first went in to help them in late 2000,” says Ron Pillar, head of communications equipment investment banking, North America, at JPMorgan. “But looking at the underlying value of the company’s assets, and its prominence in the sector, provided a much more realistic appraisal of its ability to come back than just doing a cashflow analysis.” The two lead banks made the first move. “We and JPMorgan put up the loan for the two-year facility, splitting it equally between us,” says Leat. That took care of $2.5 billion. Rolling over the 364-day facility, as well as another $2 billion in longer-term loans, he continues, “was to be dealt with in the market”. Having Citi and JPMorgan involved was crucial. They had the balance sheet to extend the two-year loan between them and their willingness to do so provided a fillip to getting the revolver sorted out. Also, both have excellent relationships for syndicating loans around the world – JPMorgan says it syndicates over 90% of all loans it arranges. But the type of structure also had to be right. Lucent was no longer a successful company but one in crisis. The terms of the loans had to reflect that. So the pricing was increased, and the company also had to put up collateral on the loans. That was not an easy thing to persuade them to do. “Lucent was reluctant to pledge assets,” says a banker familiar with the situation. “Executives thought it would limit their ability to tap other markets, lock them out of the debt markets and lead to more downgrades.” Eventually, executives accepted that not to follow the course outlined by the banks could well lead to even more problems than they were already in, and they agreed to put up assets against the loans. It probably saved the company from bankruptcy, and helped put the company back on a less rocky path. The share price is still below $10, but two units have been spun off, Kenan Systems and Agere Systems. The latter was spun off by Morgan Stanley, which completed the IPO in tough conditions in March. At $6 a share, the offer price was one-third that expected just a few months before, but it raised some cash, and Agere also took on $2.5 billion of the loans arranged in February. And in August, Lucent issued a convertible bond, one of the largest of the year at $1.8 billion, part of which was used to pay off some of the rest of the debt. AC Best leveraged loan Winner: Dresser Amount: $1.1 billion Date: April 2001 Arranger: Morgan Stanley Runner-up: Premcor Date: August 2001 Amount: $650 million Arranger: Deutsche Bank Aftermarket performance says a lot about a deal’s success, or lack of it. And on that basis alone, the leveraged buy-out of Dresser from Halliburton is a good deal. “The institutional tranche of the loan, $455 million, has never traded below par, not even after September 11,” says Hank D’Alessandro, an executive director at Morgan Stanley in charge of leverage finance for financial sponsors in the US. Given the aggressive pricing of the deal, that’s no mean feat. Its senior debt leverage multiple, at 3.3 times ebitda, was the highest of any LBO in the US last year. Its success, says D’Alessandro, is attributable to its management. “The quality of the management at Dresser is very high. They are very experienced at managing the company for cash, which is crucial for running a company with a leveraged balance sheet.” That was a major factor in convincing banks, investors and the two venture capital firms (First Reserve and Odyssey) to participate in the deal. The nature of the company helped as well. It’s a manufacturer, with tangible assets, and made money – not all that common a sight for investors even in late 2000 when Halliburton announced it was to spin the unit off. And, explains D’Alessandro: “it has a built-in diversity of cashflow. Nearly half comes from outside the US, mainly Europe. And even in a down cycle it brings in cash through its aftermarket business.” In all, Morgan Stanley arranged just over $1 billion in financing: $250 million in senior subordinated facilities, and $820 million in senior credit. Of the latter, the institutional tranche accounted for $455 million, with 78 investors taking part and receiving 350 basis points over Libor. The subordinated facilities were taken out by a high-yield bond, priced at the tight end of its range at 9.375%, making it the tightest pricing for a LBO high-yield deal since 1999 – lower interest rates helped there, of course. But the deal was heavily oversubscribed, so was upsized by $50 million to $300 million. AC Western Europe Best equity issue Winner: easyJet Deal: placing and open offer via accelerated book build Amount: £146 million Date: November 7 2001 Bookrunners: Credit Suisse First Boston, UBS Warburg Last year accelerated bookbuilding really caught on in Europe as turbulent markets ensured that conditions were too risky for most issuers to contemplate a lengthy roadshow process. A few braved the storm nonetheless – one or two with notable success. Inditex, the Spanish company that is more widely known for its Zara clothing brand is a good example. Its e2.4 billion ($2.1 billion) IPO in May was a runaway success, with its shares snapped up almost as rapidly as its mass-retail copies of catwalk designs. Following a three week-long marketing process, bookrunners SSSB and Morgan Stanley reported that demand from institutional investors outstripped supply by over 50 times, although this spectacular result was helped by the fact that almost 45% of the deal was allocated to retail investors. Though critics claim that the shares were priced to go, it’s difficult to deny the leads’ achievement in running one of the rare IPOs to trade up – by 28% at the year-end. Among the companies that came to market with secondary offerings in 2001, several stand out in terms of size. Also in May, Vodafone launched a £3.5 billion share sale via Goldman Sachs and UBS Warburg, the largest one-day sharing placing ever. Envy among rival banks’ syndicate managers was plain, with one calling this an almost flawless deal. Then again, say others, Vodafone is one of the largest, most liquid stocks in the market and the trade represented the equivalent of only two days’ turnover. Put like that, it sounds slightly less impressive. Royal Bank of Scotland caught a similar wave of demand in July, when it managed to raise £2 billion ($2.8 billion) in a day to finance the acquisition of Mellon Bank’s retail and banking division in the US. Efforts of the lead banks, UBS Warburg and Merrill Lynch, also the company’s brokers, to get the best price were hampered when news of the acquisition was leaked in early July. As a result, Royal Bank shares fell 6.5%. Notwithstanding this and the proximity of the company’s next results announcement on August 7, the leads placed 140 million shares at £14.75 a share. All of the above deals are worthy candidates for equity deal of the year but that accolade goes to the easyJet placing and open offer via accelerated bookbuild in November run by Credit Suisse First Boston and UBS Warburg. At £146 million, the deal was no giant but stands out on a number of counts. It was, according to a number of market participants, an unusual and innovative structure. “The deal incorporated a substantial shareholder, who was prepared to sell but not committed, which allowed more flexibility,” explains Charles Kirwan Taylor, co-head of European equity capital markets at CSFB. The transaction was done in two stages – 6.5 million shares in an open offer to institutions as well as a 19.5 million rights offering that was bought forward and a secondary market sale of 13 million shares. “The uncertainty was borne by Stelios [Haji-Ioannou, founder of easyJet] and this enabled the offer to avoid exposure to volatility over an extended period because of the increase in liquidity,” continues Kirwan-Taylor. Free float increased during the offer from 28% to around 40%. At the same time as the secondary offering, Stelios sold down 19.5 million shares to facilitate firm placing of the offer. He also agreed to subscribe to any shares that were not taken up. By the time the deal had closed, following a four-day roadshow, the book was five times oversubscribed at 375p a share and the price of the stock on the open market had risen from 363p before the offer was announced to 383.5p. In early January, it was trading at 477.5p as the trend for money to move into low-cost airlines away from the incumbents became firmly established in Europe. Furthermore, easyJet made a bold move in stepping forward into the gulf of inactivity that opened up in the equity markets following the September 11 attacks. As an airline, it was far from being an obvious choice and yet the gamble paid off. Jennifer Morris Best corporate bond Winner: GlaxoSmithKline Deal: £1 billion 32-year Amount: £1 billion Date: December 11 2001 Bookrunners: Credit Suisse First Boston, Schroder Salomon Smith Barney If size was everything then the award for corporate bond deal of the year would go yet again to France Telecom for its $16.4 billion equivalent multi-tranche deal in March. Completed at what, in retrospect, was the bottom of the market for the telecom companies, the deal put paid to investor fears that the sector was not ultimately financeable and brought sighs of relief all round. France Telecom had originally intended to sell between $7 billion and $8 billion-worth of paper, primarily to open up the dollar market. However enormous demand allowed for e7 billion ($6 billion) in two tranches and a £600 million ($800 million) tranche to be added. “As the momentum built, this became a must-have transaction,” says a banker at one of the lead managers. “There was a sense among investors of ‘I can’t be the only one not to own this deal.’” That’s not to say that size didn’t play a part in defining the winning deal. But the achievement of this company was in generating such demand in a currency that some investors predicted would become marginalised with the growth of the euro market. GlaxoSmithKline’s £1 billion issue in December is the biggest-ever single-tranche sterling-denominated bond, proving beyond doubt that this market has come of age. The lead underwriting banks, CSFB and Schroder Salomon Smith Barney, were able to place the Aa2/AA rated paper at 75 basis points over gilts, following price talk of 75bp to 80bp. By the time the book closed orders from 99 investors totalled £2.27 billion. Also notable is the maturity date of 2033, a tenure not yet achievable for corporates in the euro markets. “Glaxo took advantage of a number of important trends,” explains Stuart Bell, director, debt syndicate at CSFB, which lead managed the deal along with SSSB. Some of these are external, for example. the disjuncture between supply and demand, demonstrated by the inverse yield curve in the sterling market. This is largely driven by minimum funding requirements for pension fund investments at the same time as the UK government has been paying back much of its debt. Pension funds’ appetite for high-grade, long-dated assets has been sharpened by the introduction of FRS17 accounting rules obliging firms to mark the value of their pension portfolios to market. “Over the past 12 months, sterling 30-year government yields have consistently quoted below the equivalent 30-year yields in the US and European government markets, on occasions the gap has been as great as 110 basis points. You wouldn’t expect to see this given the inflation and economic fundamentals in each area,” says Bell. It’s also a smart move for a firm to do a very large deal as this helps create self-fulfilling demand. Because the credit is included in the major indices, investors have to buy it if they follow the index. As a result, the pricing has come in almost 4bp since issue. JM Best loan Winner: Messer Griesheim Deal: syndicated loan Amount: e1.7 billion Date: May 2001 Lead manager: Goldman Sachs Goldman Sachs scored a hat trick with the leveraged buy-out of Messer Griesheim in May. On the back of its strong corporate relationships in Germany, Goldman advised Allianz Capital Partners, Messer Industrie and its own private-equity division on the purchase of industrial gases company Messer Griesheim from Aventis. It then arranged the debt facilities to refinance the deal, comprising a e1.7 billion ($1.5 billion) senior credit facility and e400 million of high-yield bonds. It showed the firm’s ability to compete with the giant universal banks. The loan part of the transaction was relatively complex, including different maturities, with term, bullet and revolving loans in dollars and euros, designed to appeal to as many investors as possible. It also clearly demonstrated the depth of demand for industrial paper and was instrumental in preparing the market for several large deals that followed. Later the same month, Barclays and Deutsche Bank raised e1.7 billion to refinance the LBO of Kappa Alpha Holding by Kappa Packaging and in June, Apax and Hicks, Muse Tate & Furst tapped the markets for £1.05 billion ($1.5 billion) of new money via Merrill Lynch and CIBC to buy Yell, the directories business of British Telecom. Rick Revell, head of distribution at Goldman Sachs, is keen to point out the complexities of the deal. “Up to 50 people worked on this deal and it took nine months to close.” This was partly because of its size and partly a result of the significant amount of due diligence that was done. Goldman and the sponsors took the decision to include a $225 million two-year asset disposal tranche, because of the large number of sales of non-core assets that the company plans. Winfrid Schmidt, treasurer of the Messer Group, explains: “Part of our new strategy is that we will concentrate on our core businesses in Europe and the US.” The tranche was included to demonstrate how serious the company is about this. “The two-year disposal tranche which had never been tried in Europe before, sent a strong signal from the sponsor as to their confidence on the disposals,” says Oliver Duff, executive director of syndication at Goldman Sachs. Total proceeds from divestments is expected to be around e400 million. Another novel aspect of the deal was the fact that the pricing for one tranche was revised downwards during syndication, from 350 basis points to 325bp, thanks to massive investor demand. This was something that had never been tried before in Europe but Goldman Sachs was confident it could pull it off. “We brought in 53 institutions which is a record for a European LBO,” continues Revell, who claims that on other deals in 2001 that number was nearer to 20. The financing was completed in four weeks and involved one round of syndication. “We had expected a much longer process so we were very pleased that it was done in a single step,” says Messer’s Schmidt. “The whole transaction was basically a deleveraging story, without this the whole refinancing would have been much more difficult.” There was some criticism at the time of the choice of Goldman as coordinator, given the involvement of its own private-equity arm in the transaction, but Duff points out that the firm competed fiercely with leading international banks as well as German relationship banks for the lead arrange position on the deal. JM Best equity-linked bond Winner: France Telecom Deal: Exchangeable into the company’s existing shares Amount: e3.5 billion Date: November 21 2001 Bookrunners: BNP Paribas, Morgan Stanley Variety was distinctly lacking in the equity-linked markets last year. As in fixed income, telecom companies were dominant. Big deals included Telecom Italia’s e2.5 billion ($2.2 billion) convertible into Telecom Italia Mobile (TIM) in January and France Telecom’s $2.5 into Orange, run alongside its flotation in February. The latter won France Telecom few admirers. “The Orange convertible allowed the IPO to get off the ground but in reality the price meant it was almost a free option,” says a banker not involved in the transaction. Also prominent were relatively straightforward deals from the financial sector. Slightly more innovative were Lehman Brothers’ two exchangeable unrated bonds run for Italian insurer La Fondiaria. The e697 million and e550 million issues included step-up or step-down language if the deals subsequently gained a rating. But critics say that the fact that these deals were so highly oversubscribed suggests that the company gave away too much in the price. “This looks good on paper but in the end it’s innovation for innovation’s sake,” says one. Then in November France Telecom bounced back to liven up the markets with a monster-sized e3.5 billion convertible. This deal makes it the clear winner in the equity-linked category for 2001 in terms of scale – it was the biggest equity-linked issue ever done in Europe – timing and the size of the premium at which the leads were able to get the deal done. The company had very specific requirements, says Danny Palmer, head of European convertible origination at Morgan Stanley. It wanted to dispose of its own shares it had acquired via a series of put options it had agreed with Vodafone at the time of the Orange deal. However, France Telecom had also pledged to the market that it would not sell at less than e70 a share. “We were watching the price carefully and in November, it started to pick up,” recalls Palmer. “When it stated to edge up towards e50 alarm bells started to go off as we realized we could get to the e70 conversion price.” Timing was crucial to the success of the deal. If the share price fell, France Telecom risked its reputation. That explains the decision by the leads to sell the deal while the market was closed so the stock couldn’t be affected by hedge fund activity. Books opened in the evening on November 20 and closed at 7.30am London time the next day. “Having seen the level and quality of demand, we could have closed the deal the same evening but decided to keep it open to include as many investors as possible,” says Bertrand Lussigny, a member of the syndicate at BNP Paribas. Despite grumbles from a few institutions that they weren’t given enough time to put in their orders, most market participants speak highly of the deal. The conversion premium of 47% was a particularly bold move – most deals in Europe until that point included a premium of up to 35% – but the banks were confident that it would work at that price. “France Telecom is such a strong name that you can’t be a serious equity-linked investor and not be in this deal,” says Palmer. In retrospect the leads showed impressive foresight in detecting such a narrow opening in the market. France Telecom’s share price has since fallen to around e39. JM Best structured finance deal Winner: Western Power Distribution Deal: whole-company securitization Amount: £2.5 billion Date: May 2001 Lead managers: Schroder Salomon Smith Barney, RBS Financial Markets In a year that was light on innovation, one deal grabbed most of the attention in the structured finance arena – the securitization of Welsh Water. The rationale behind the deal was to enable Western Power Distribution, which bought Hyder in 2000, to dispose of a business most of which was cumbersome and unprofitable, while retaining the profitable part. WPD was only interested in keeping Hyder’s electricity assets and not its water business. One of the leads’ greatest achievements was managing to get the structure past the UK water regulator, Ofwat, which in 2000 had turned down an application from Kelda, the company that owned Welsh Water, to change the ownership structure of its Yorkshire Water utility. The new structure of Welsh Water is similar, involving a bond-funded not-for-profit company, Glas Cymru, running the water utility for the benefit of its consumers rather than for shareholders. Read Gomm, co-head of European utilities at Schroder Salomon Smith Barney, explains: “WPD had 14 different disposals to do and Welsh Water was the biggest. There were relatively few potential trade buyers for the business and regulatory issues meant that none of the incumbents could buy it either.” WPD therefore used a securitization process to dispose of Welsh Water instead. The deal comprised 12 tranches of notes, 11 sterling and one dollar, five of which are wrapped by AAA rated insurer MBIA Assurance. Of those without this insurance wrap, the most highly rated is A3/A/A- and the lowest Baa3/BBB/BBB, which means that Hyder succeeded in its aim of improving its rating as part of the restructuring. In 2000, it had been downgraded by Standard & Poor’s from A– to BBB–. According to the leads, all the tranches were highly oversubscribed hence prices were as tight or tighter than expected. Hyder’s savings are expected to be in the region of £50 million to £70 million a year and will be used to build reserves in order to enhance credit quality which would possible lead to a rating improvement in the future. Some critics contend that this model was specific to Hyder and is not easily transferable. “There were a number of specific circumstances surrounding Glas Cymru,” says one banker. “One is that shareholders were willing to give up their interests so that surpluses could be retained by the company and passed on to customers. The other is that the vendor, WPD, was prepared to accept a discount to the asset value of the company. Other firms will find it difficult to do this.” Gomm challenges this view and says that although this may have been a one-off, it is forcing change throughout the regulated industries sector. JM Best high-grade Bond Winner: Kreditanstalt für Wiederaufbrau Amount: e5 billion 10-year bond Date: March 22 2001 Bookrunner: Deutsche Bank, Schroder Salomon Smith Barney, UBS Warburg At the beginning of 2001, Frank Czichowski, head of international markets at Kreditanstalt für Wiederaufbau (KfW) issued a plea to the market to view KfW not as an expensive credit, but as cheap government paper. It seems to have worked. In March, the German development bank’s e5 billion ($4.8 billion) bond, which is backed by guarantees from the Federal Republic, priced at 45 basis points over the 2011 Bund, which, significantly, was 3bp inside its outstanding paper. These achievements earn KfW’s 10-year bond the accolade of deal of the year in this category. According to the leads, Deutsche Bank SSSB and UBS Warburg, 80% of the paper was sold to dedicated buyers of government paper. German investors dominated the transaction, taking 28% of the bonds, followed by the UK at 17%. The rest was distributed in other European countries, the US and Asia. “KfW was well positioned to provide added value to investors through increased liquidity and transparency and because of its government guarantee,” says Martin Keutner, executive director in debt capital markets at UBS Warburg. “This was clearly a winning formula for investors.” “The deal introduced KfW into the world of the euro government bond investors,” says Philip Brown, managing director, sovereign, agency & supra capital markets at SSSB. “One or two years ago, peripheral European sovereigns were trading much richer to Bunds than AAA rated European Investment Bank and KfW,” he continues. That’s no longer the case. KfW priced 2bp through Italy and at parity to Portugal, making it the first non-government borrower to price better than EU sovereigns. Since issue, the deal has tightened from 45bp to 24.5bp over Germany, and now trades flat to Austria and Spain, an outperformance of 8bp and 11bp respectively. Clearly, KfW’s success has shaken up sovereign issuers. When Spain announced its issuance programme for 2002, for example, it said that it intended to replace auctions for at least one of its deals with a syndication process. Italy is also contemplating syndication for future issues. It has also proved qualitatively that investors are willing to pay a premium for liquidity. “Before this, the question was always: ‘How do I know that’s true?’” says the head of syndicate at another bank. Having firmly established itself in the euro market – it also did five-year and three-year deals in 2001 – KfW set out to do the same in the dollar market where its paper was trading too cheaply for its own liking. On January 18, its $3 billion five-year issue priced at 5bp over US agencies suggesting it is well on the way to rectifying this. JM Best M&A deal Winner: Apax Partners/Hicks, Muse, Tate & Furst Type of deal: LBO of Yell Amount: £2.1 billion Date: June 2001 Adviser: Merrill Lynch M&A bankers had a quiet time in 2001. Following several years of frenzied activity, suddenly they found themselves with some time on their hands. There was a flurry of deals in the utilities sector. German company E.ON’s acquisition of UK company PowerGen for example and Spanish utility Hidrocantábrico’s sale to a consortium backed by Germany’s EnBW and Electricite de Portugal, both took place in April. Electricité de France’s battle with the Italian government over control of Montedison followed in October. Pirelli also caused waves in Italy when it snapped up Telecom Italia for e7 billion ($6 billion) by buying Bell’s stake in Olivetti in July. But big headline-grabbing deals were few and far between last year. Some M&A teams said they were keeping themselves busy “building relationships” with clients. Others went a step further and generated deals themselves. It is one such deal – the sale of British Telecom directories firm Yell to Apax and Hicks, Muse, Tate & Furst for £2.1 billion – that wins the European M&A deal of the year award. This acquisition clearly demonstrates the capacity of the private-equity industry to complete sizeable buyouts. A year earlier, a transaction of this size would have been considered beyond its reach. At the time of the deal, in June, BT was facing enormous debts. As a result of having overstretched itself bidding for 3G telecoms licences and buying stakes in other companies, it had become highly leveraged and desperately needed to improve the health of its balance sheet. Merrill Lynch was acting as adviser to BT on a huge £6 billion rights issue, intended to help the company get its head above water, as well as on the sale of its interests in Japan Telecom and Airtel. Morgan Stanley and house broker NM Rothschild meanwhile had been appointed to advise on the disposal of Yell. They recommended that BT either float or demerge Yell as soon as market conditions improved enough to allow for this. But there was no guarantee that BT could wait that long or that, if it managed to pull off a public offering, that this would reduce debt sufficiently. So Merrill’s media team, led by Philip Yates, suggested a sale instead. It was then down to its financial sponsors group, led by Naomi Molson in London, to do the matchmaking. Molson explains how she approached Apax and Hicks Muse, two of the largest private equity firms, both with a strong interest in the telecommunications and media sectors to gauge their interest. The initial reaction was that such a large deal was not possible for a private-equity firm – at least not single-handed. “Basically we presented the transaction to them and they said, ‘okay, we like the idea, but tell us how we can do it’,” she recalls. How to do it involved Merrill’s underwriting the financing package to a total of £1.55 billion, of which £1.05 billion was a syndicated loan and the rest a high-yield bond. JM |
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