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28 | June 2010 | ifr Top 250 Borrowers LIABILITY MANAGEMENT

European corporate IG redemptions

€bn 25

and in which they may struggle to get their allocation.”

20 15 10 5 0

Jan 11

Source: Barclays Capital

In the first five months of the year, BofA Merrill estimates deals with a value of €35bn were executed. The data does not distinguish between FIG and non-FIG borrowers, but the trend is clear, the wave of FIG deals that saw banks buying back debt and exchanging at below par is over and has been replaced by a resurgence of corporate liability management. “We expect that to continue for at least the next 12 months,” Cavanagh said.

A liability management exercise

involving a tender and new issue enables a company to work with existing investors that are already knowledgeable about the credit, enabling a more efficient execution. It also addresses potential concerns from rating agencies and investors. On the other side of the trade, investors enjoy receive a premium to secondary market trading levels as compensation for the duration extension.

A liability-driven fork in the road Treasurers face a dilemma in deciding whether to pursue a buyback and new issue, or launch an exchange offer. Both have their advantages and disadvantages. In times of depressed bond prices, companies bought back their bonds outright and booked accounting gains on the discount – the difference between what they paid and the original value they were issued at. However, where a company’s bonds are trading above par the company bear’s the difference as a cost. If new bonds are issued in exchange IFRS accounting standards makes them eligible for “exchange accounting

treatment”, which allows the buy-back premium to be amortised. “Under exchange offers, companies gain a more efficient cost of funding and investors get newer, longer-dated bonds,” said Cavanagh. “An exchange would be preferable to a new deal that exceeds demand and where issuers have to offer more attractive for investors. Instead two smaller sized deals with greater demand can afford a tighter spread to cover the book size, lowering the all-in cost. This gives treasurers a back-up plan.” “Where the new issue market is a challenge then the beauty of an exchange for the issuer is that in the worse-case scenario investors keep the old bond,” added Sfakianos. “In the best case scenario they take a new bond with a longer maturity. In this case, it is a cautious trade.”

The disadvantage of the exchange offer is that they bring with them price uncertainty: the price is not fixed for four or five days after it is issued, which may be undesirable in times of volatility. Furthermore, existing investors may not want to exchange, or they may no longer be the right kind of investors. Where an issuer is seeking to exchange a two-year outstanding issue with a new ten –year bond, for example, investors in short duration bond funds will not be able to participate. “Investors have a lot of cash put to work and they are concerned about re- investment risk,” said Sfakianos. “Investors may see no value in selling out of a bond then struggling to re-invest in a new issue which may be oversubscribed


Jan 12


Jan 13


Jan 14


There is no hard-and-fast rule and the best option varies from company to company. This month, French chemical company Air Liquide braved the recent market volatility and effectively re-opened the market with a €331m exchange/tender offer, intended to convert €500m of 2012 notes into new 10-year note. The trade combined an exchange offer with a cash alternative, which, because it was issued by BNP Paribas acting as an intermediary, was exempt from the one-off accounting charge. Air Liquide, rated A, was a rare and quality name and coupon spreads had widened. The coupon for the ten-year exchange offer was 3.888%, which was very attractive.

By contrast, earlier in the year Rallye opted for a new issue and a buy-back with a €116m tender offer targeting 2011 notes and new issue of 2014 notes. This carried big execution risk: there was a danger associated with issuing the new bond before the buyback, but Rallye timed both trades to settle on the same day. The company was unrated and its priority was to get the deal done. A new issue was therefore regarded as the less risky option. The Air Liquide deal is part of the new

wave of deals that extend maturities on 2012 debt. Bankers predict a healthy pipeline of similar deals. Issuance has tra- ditionally been constrained by blackout periods and seasonality. However, the new proactive approach from treasurers means that European companies are starting to adopt a year-round mentality to funding, rather than deferring any refinancing decisions over the summer, according to bankers. “A resumption in the M&A calendar will see issues relating to buying up outstanding bonds of the target company,” added Cavanagh. However, bankers predict that it is only a matter of time before FIG borrowers return to the market. A trigger point could be the new regulatory regime ushered in by Basel II recommendations, which will set new rules for the amount of capital banks must set aside. “Once Basel II is set, financial institutions will undertake widespread liability management exercises in order to arrive at the optimal capital structure,” said Sfakionos.

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