Deals of the Year 2013 – Europe

Bonds: Corporates

Winner: BG Group $1.57bn hybrid bond, UK
Structurers and bookrunners: BNP Paribas, RBS

Bookrunners: Barclays, Deutsche Bank
Highly commended: Brunswick Rail $600m Eurobond; Virgin Media £2.3bn bond
Corporate hybrid bond issuance has surged since mid-2012, as companies tap into increased risk appetite to raise finance without pressuring credit ratings or borrowing covenants. UK gas utility BG Group was the trail-blazer in June 2012, and with a particularly impressive issue.

Faced with the combined challenges of preserving its A credit rating and financing capital investment needs of approximately $20bn over two years, hybrid issuance was a logical choice. But an issue of £1bn ($1.53bn) or more was likely to be too large for the domestic investor base alone to absorb. Hence a group of four bookrunners devised a deal in sterling and euros, adding a dollar tranche two days later on strong demand from Asia.

The two structurers worked to meet BG Group’s desire for 50% equity credit from the ratings agencies while ensuring there was adequate appeal for investors, and that the issue was treated as debt for accounting purposes. The techniques used included an innovative coupon step-up at 5.5 years, resetting from a fixed 6.5% to the initial credit spread plus the prevailing five-year mid-swaps rate at that time.

Demand was strong on both euro and sterling order books – €1.2bn and £1bn – with minimal participation from hedge funds. This allowed bookrunners to take advantage of superior pricing on the sterling tranche, upsizing it to £600m compared with E500m. Meanwhile, the dollar tranche received a staggering $4.5bn in demand, allowing BG Group to issue its maximum target of $500m.

The highly commended deals were a debut $600m Eurobond from Russian railcar leasing operator Brunswick Rail, and the Virgin Media £2.3bn four-tranche bond, which was the largest sterling high-yield deal ever and encouraged a comprehensive rethink of the amounts of debt available for European leveraged buyouts.
Bonds: SSA
Winner: Kingdom of Spain E7bn senior unsecured bond
Bookrunners: Barclays, BBVA, Citi, Goldman Sachs, Santander, Société Générale Corporate & Investment Bank

Highly commended: Russia $7bn three-tranche Eurobond; Bulgaria €950m Eurobond
January 2013 was the month when the eurozone periphery was able to return to the global capital markets in force – at least for a few weeks. Spain’s blockbuster €7bn sovereign bond was one of the trailblazers, confirming the willingness of a previously sceptical investor base to take on peripheral risk in large volumes.

With a 10-year maturity, this bond marked Spain’s first use of a syndicated issue in a year, and the first syndicated deal in two years not to tap an existing issue. In just 90 minutes of bookbuilding, €23bn-worth of orders were placed from more than 300 different accounts, the largest order book ever for a Spanish sovereign deal.

This allowed the eventual €7bn deal, jointly Spain’s largest ever, to price five basis points inside initial guidance. Particularly satisfying was the fact that the captive domestic investor base did not account for the majority of distribution, taking only about 40% of the issue. The strength and breadth of appetite allowed several sovereign and sovereign-linked issuers from the region to follow in the days immediately after, including Spanish financial agency Instituto de Credito Oficial, the Madrid regional authority and the government of Portugal.

The judges highly commended a sophisticated $7bn deal for Russia in March 2012 that carried three tranches with five-, 10- and 30-year maturities. This was the largest deal ever from Russia, and its skilful execution helped re-establish the issuer’s reputation after a deal in 2011 that fell sharply in the aftermarket owing to the eurozone sovereign crisis. Meanwhile, the rarity value of Bulgaria’s €950m return to the sovereign bond market for the first time since 2002, and the perfect timing just as sentiment toward the eurozone was recovering in July 2012, allowed bookrunners to build orders of €6bn. This gave Bulgaria an ample fiscal buffer at a low price of just 4.25%.
Equities
Winner: Volkswagen €2.5bn subordinated mandatory convertible and €618m accelerated delta placing of secondary preferred shares, Germany
Bookrunners: Bank of America-Merrill Lynch, Credit Suisse, Deutsche Bank
Highly commended: Alior Bank 700m zloty initial public offering; Telefonica Deutschland €1.45bn initial public offering
If the first half of 2012 was characterised by banks strengthening their balance sheets against the hit from peripheral Europe, in the second half it was the turn of corporates to reduce leverage while seeking to avoid diluting shareholders. That meant the re-emergence of European mandatory convertibles, after a hiatus since October 2009.

Volkswagen reopened the European convertible market in November 2012 in a dramatic fashion, with an offering of at least €2bn alongside an accelerated placing of shares for those investors in the convertible who wanted to sell the equity risk (the delta placing). The convertible was structured to receive full equity credit from the ratings agencies, while the conversion rate of at least the delta placing price plus a maximum of 20% minimised the risk of dilution to existing shareholders.

Both parts of the deal were a marked success. The convertible pulled in orders for €6bn, allowing the bookrunners to upsize it to E2.5bn, the largest ever European convertible. About 66% of investors were long-only funds, while the geographic split was a well-balanced 40:35:25 between Europe, the US and the rest of the world.

Only about one-quarter of investors wanted the delta hedge, limiting the size of the equity placement to €618m, compared with expectations of up to €1.2bn. This helped bookrunners price the equity leg of the deal at a discount of less than 5% to the prevailing stock price.

Valuations on European banking stocks remain low, so the success of Europe’s largest bank initial public offering (IPO) in 2012, Poland’s Alior Bank, was well worth a commendation. Also commended was the capital raising for Spanish telecom company Telefonica via an IPO of its German subsidiary – astutely using the premium for German over peripheral eurozone assets.

FIG Capital Raising
Winner: UniCredit €1.25bn lower Tier 2 subordinated bond, Italy
Lead managers: Credit Suisse, Goldman Sachs, UniCredit
Highly commended: Highly commended: Banco Popular Espanol €2.5bn rights issue; VTB $1bn perpetual Tier 1 Eurobond
Until mid-2012, banks in the eurozone periphery had been reduced to funding themselves purely through the most conservative and least cost-effective instruments: covered bonds. There were growing concerns about the encumbrance of bank assets as cover pools grew in size. Meanwhile, to improve capital ratios, the only real possibility was to raise equity from the markets – as UniCredit had done with a heavily dilutive rights issue in January 2012 – or from the state.

Uncertainty over the final European interpretations of Basel III capital rules also dampened the market for subordinated debt.

After Mario Draghi’s promise to do “whatever it takes” to save the euro, the stage was set for a resurrection of the subordinated debt market in Europe, and UniCredit was the bank that stepped into the limelight. This was appropriate, because 18 months earlier the Italian bank had also been the last to issue lower Tier 2 before the eurozone crisis shut the market. In line with the new regulatory developments, the bond included a provision to call at par if future regulatory developments mean it is no longer eligible as bank capital, and documentation flagged up the risk of statutory loss absorption on the instrument.

The 10-year issue was heavily oversubscribed, allowing lead managers to drive the spread down from initial guidance of 530 basis points over mid-swaps to just 510 basis points. This pricing represented a spread of 190 basis points over UniCredit’s senior unsecured yield, the tightest ratio for any European bank at the time aside from Rabobank, which has much higher credit ratings than UniCredit. As little as 13% of the order book was domestic, showing the strong international support for peripheral lower Tier 2. This helped to reopen sub-debt markets decisively to Spanish and other Italian banks, while Portuguese players were able to re-access the senior debt market.
Infrastructure and project finance
Winner: Peel Ports £1.6bn refinancing and whole business securitisation, UK

Mandated lead arrangers: Bank of America-Merrill Lynch, Barclays, Canadian Imperial Bank of Commerce, Commonwealth Bank of Australia, Goldman Sachs, National Australia Bank, RBS, Scotiabank, UBS
Financial advisors: RBS, Rothschild

Highly commended: Eiffarie APRR €3.5bn refinancing; Western High Speed Diameter toll road Rbs72bn financing
The shrinking of European bank balance sheets is a challenge for infrastructure finance, given the long tenors and large ticket sizes that the business typically involves. Switching project borrowers to the bond markets is essential, but not always easy given the nascent state of a project bond investor base.

Peel Ports needed to refinance £1.2bn ($1.8bn) of bank loans maturing in December 2013, while also raising a fresh £345m to construct a deep-sea container terminal in Liverpool. Diversifying the funding format was clearly essential, but the issuer also wanted to avoid breaking the hedging structure put in place with the original loan in 2006, which swapped floating rate bank debt to match the ports’ stable and inflation-linked cash flows.

The solution devised by RBS and Rothschild was a ring-fenced whole business securitisation platform, the first of its kind for a non-regulated project borrower, capable of issuing in different formats. The eventual issues consisted of three- and five-year term loans, a five-year liquidity facility, seven-year capital expenditure facilities, and a further £150m capital expenditure facility from the European Investment Bank (EIB). The deal set a precedent with a common terms platform in which the EIB signed up simultaneously with the commercial bank club. Many of the mandated lead arrangers also participated in a novation transaction that added at least five swap counterparties to each of the six existing hedge tranches that Peel Ports wanted to keep intact.

Peel Ports also tapped the private placement market for a further £350m equivalent, and placed £26m (later upsized to £40m on extra demand) as an institutional term loan.

Islamic finance
Winner: Republic of Turkey $1.5bn sukuk
Lead managers and bookrunners: Citi, HSBC, Kuwait Finance House/Liquidity Management House
Highly commended: Albaraka Turk $450m dual currency syndicated murabaha trade finance facility
After a number of sharia-compliant transactions from Turkey’s Islamic banking sector since 2010, there had long been an expectation that the sovereign would tap the sukuk market to establish a benchmark for the country. That became a reality in September 2012, with the sovereign’s debut using a sukuk al-ijara structure, marking the first sukuk issued by a European sovereign.

There was plenty of groundwork needed, including new legislation passed in June 2012 and a structure that combined appeal to the broadest possible range of sharia compliance boards, plus a 144A/Reg S format to catch conventional US investors. The new legislation allowed the use of state properties in a sale and leaseback (ijara) structure to back the sukuk with real assets, as required by Islamic law.

Broadening the sovereign’s investor base into the Gulf states and south-east Asia was a key objective, with a roadshow that took in the major centres of Islamic finance on those regions. The focus achieved impressive results, with an order book that included 165 new investors out of a total of 250. Middle East investors comprised 58% of the total orders, while 40% came from accounts that invest only in Islamic assets.

The issue ultimately received orders of more than $7bn for a $1.5bn offering, allowing bookrunners to price the five-year sukuk 10 basis points inside Turkey’s conventional bond curve. That represented the lowest fixed coupon for any high-yield sukuk deal, on the largest debut sovereign sukuk ever issued, decisively opening the market for Turkish corporate issuers.

The maturing of Islamic finance in Turkey was also well demonstrated by the highly commended deal, a $450m one-year syndicated murabaha (commodity sale and purchase) facility for Albaraka Turk Islamic bank. This was the largest murabaha signed in Turkey to date, and was priced in dollars and euros to broaden the syndicate base.
Loans
Winner: Telefonica £3.4bn loan, Spain
Bookrunners: BBVA, BNP Paribas, Banesto, Bank of Tokyo Mitsubishi, Barclays, Citibank, Commerzbank, Goldman Sachs,
HSBC, Instituto de Crédito Oficial, Intesa Sanpaolo, JPMorgan, Lloyds, Mediobanca, Mizuho, Morgan Stanley, RBS, Société Générale Corporate & Investment Bank, Santander, SMBC, UBS, UniCredit
Highly commended: Rosneft $16.8bn acquisition financing; SNAM E11bn spin-off financing
The loans category in Europe was one of the hardest fought, with deals impressive for sheer size and underwriting commitments rubbing shoulders alongside some skilful transactions adapted to cope with market conditions. Spanish telecoms giant Telefonica’s refinancing of £3.4bn ($5.21bn) in loans originally contracted following its acquisition of O2 in 2006 ultimately won through thanks to its innovative structure.

Even for an investment-grade company with existing credit lines and a large business footprint outside Spain, the prospect of raising such a sum for a peripheral eurozone country in March 2012 was still daunting. Yet Telefonica shouldered this task directly by acting as its own arranger on a £2.1bn forward start facility, and a £1.3bn five-year revolving facility.

At that point, there were still grave doubts about the survival of the euro, which inspired Telefonica to adopt a dual-law structure. This involved issuing the loan under both Spanish and English law. The eurozone component made the loan eligible as collateral for refinancing transactions with the European Central Bank, vital for eurozone banks to find the liquidity for such a deal. The English law component offered protection to non-eurozone creditors in the event of a de-euroisation.

The gambit worked, pulling in healthy oversubscription from a geographically diverse syndicate of 37 banks. Two of those, Goldman Sachs and HSBC, were new lenders, and 10 existing lenders increased their total commitments to Telefonica to participate.

In terms of size, there was little to compare with the $16.8bn club financing for Rosneft’s acquisition of BP-TNK, one of our highly commended deals. SNAM’s E11bn bridge loan to finance its spin-off by utility ENI was also an impressive deal, especially given investor uncertainty toward Italy.

M&A
Winner: £1.55bn management buyout of Iceland, UK
Financial advisors to buyers: Deutsche Bank, HSBC, Nomura, Rand Merchant Bank, Rothschild
Financial advisors to sellers: Bank of America-Merrill Lynch, UBS
Highly commended: Hong Kong Exchange £1.4bn acquisition of London Metal Exchange; €3.2bn acquisition of Open Grid Europe from E.ON
Other deals in 2012 may have been larger, but for sheer courage, neat footwork and poetic justice, nothing quite beats the buyout of Iceland from the wreckage of the Icelandic banking crisis. Founded by Malcolm Walker in 1970, the UK supermarket was the subject of an ill-fated buyout in 2001. After several years of losses, Mr Walker returned to put the firm back on track, on the back of a buyout by Icelandic private equity fund Baugur.

But Baugur, along with its main creditors Glitnir and Landsbanki, had overreached itself. In 2009, all three collapsed, and by the start of 2011, the winding-up committees for the two Icelandic banks had resolved to sell the supermarket chain.

This was the beginning of a delicate process in which Mr Walker and his management team ultimately worked with international retail group Landmark, South African investment group Brait and private investors to patiently outmanoeuvre several trade and private equity buyers, securing a management buyout of Iceland for £1.55bn ($2.37bn) in March 2012.

From the beginning, advisors to the consortium had to rebuff attempts by Glitnir and Landsbanki creditors to talk up the recovery value of the banks’ assets including Iceland, given the management’s lower financial firepower than some rival bidders. The management team did not enter the official auction process, but instead waited until exclusivity requests from other potential bidders allowed the consortium to step in with an offer outside the auction.

Deals highly commended included the Hong Kong Exchange’s acquisition of the London Metal Exchange, the world’s largest metals exchange, and the sale of E.ON’s vast German gas distribution pipeline network to a consortium of dedicated infrastructure investment funds.

Real estate finance
Winner: Deutsche Annington Grand €4.3bn commercial mortgage-backed securities restructuring, Germany
Financial advisor to the borrower: Blackstone
Financial advisor to the issuer: Cairn Capital
Financial advisor to the servicer: Brookland Partners
Financial advisor to the noteholders: Rothschild
Highly commended: Vitus Immobilien €754m multi-property commercial mortgage-backed securities
The wall of refinancing needed, together with uncertainty over how to restructure existing commercial mortgage-backed securities, has served as something of a roadblock to commercial real estate lending in Europe. The refinancing of the €4.3bn German Residential Asset Note Distributor (Grand) commercial mortgage-backed securities (CMBS) issued by real estate developer Deutsche Annington, completed in December 2012, was a significant step forward in answering some of those questions.

Issued at the height of the boom in 2006, with an initial €5.8bn outstanding, Grand was and remained the largest European CMBS ever launched, and one of the most complex in terms of its structure. It was due to mature in 2013, but by 2010 it was already clear that the market depth and appetite for leverage needed to allow a full and straightforward refinancing through fresh CMBS issuance simply would not be available.

This led to two years of negotiations with a very diverse pool of noteholders, totalling about 125 spread across six classes of debt. Nor was this simply a two-way process, involving as it did multiple stakeholders including the trustee for the issuing vehicle and the CMBS servicer. Technical defects in the original documentation meant it was impossible to determine the necessary noteholder quorum to amend terms, so Deutsche Annington applied for a UK scheme of arrangement more commonly used by borrowers who have already defaulted, which was clearly not the case in this instance.

Annington’s private equity owner, Terra Firma, ultimately agreed to inject €504m in equity to reduce total debt to €3.8bn, resulting in a 59.7% loan-to-value ratio at the point of refinancing.

Restructuring
Winner: Eircom €4.17bn restructuring
Financial advisors to borrower: Gleacher Shacklock, Jamieson Corporate Finance, Morgan Stanley.

Financial advisor to lender coordinating committee: Houlihan Lokey
Highly commended: Skyepharma £83m convertible bond restructuring; Travelodge £1.1bn restructuring
Acquired by Singapore Telecommunications Telemedia (STT) in 2009, Ireland’s fixed-line and mobile provider Eircom was hard hit by growing competition and the country’s economic crisis. With a covenant breach looming in June 2011, senior lenders took the initiative by forming a coordinating committee.

The committee’s advisor proposed senior lenders acquiring Eircom by partially equitising €3bn senior loans while writing off €350m floating rate and €713m payment-in-kind notes. This was no small task – the loans were held by more than 100 lenders, ranging from commercial banks through hedge funds to collateralised loan obligations (CLOs). Banks wanted the minimum write-down on debt, but CLO managers were equally concerned about the eventual credit rating on the capital structure that emerged, given the tight investment rules under which they operate.

Trade unions and the national telecom regulator also had to be consulted. And existing interest rate swap agreements needed to be fitted to the smaller senior debt facilities.

A majority of lenders supported the deal, mainly because it avoided handing value to STT – which proposed recapitalising the business itself – external acquisition bidder Hutchison Whampoa, or junior lenders who were technically out of the money. The restructuring also left the company with the operational liquidity needed to improve its functioning as a business.

The many moving parts were managed through an Irish examinership process – the largest and most complex capital structure ever to undergo this insolvency procedure. The company emerged from examinership in June 2012, just 74 days after its initial filing.  

The UK’s largest company voluntary arrangement to date, for hotel chain Travelodge, was highly commended. So too was the much smaller convertible restructuring for pharmaceuticals firm Skyepharma.

Structured finance
Winner: £2.25bn Fosse 2012-1 Santander UK residential mortgage-backed securities
Arranger and joint lead manager: Barclays
Joint lead managers: JPMorgan, Santander
Highly commended: £1.02bn Center Parcs whole business securitisation; General Motors Acceptance Corp €902m
dealer finance securitisation
The UK residential mortgage-backed securities (RMBS) market is probably the healthiest aspect of a European securitisation industry that has staged a very anaemic recovery since the financial crisis. Even so, innovation has not generally been the order of the day. Consequently, the Fosse master trust RMBS launched for Santander’s UK residential mortgage business in May 2012 was eye-opening for several reasons.

The size alone was significant – £2.25bn ($5.36bn) with an average weighted life of three-and-a-half years provided a meaningful amount of medium-term funding at a cost of funds that compared favourably with Santander’s other sources of wholesale financing. But the deal also broadened the investor base and made the use of mortgage collateral much more efficient than other post-crisis RMBS deals.

The offering included a mezzanine tranche, rated AA, which was sold in sterling and dollars. This was the first publicly placed UK RMBS mezzanine tranche since 2007, and three times oversubscription on the dollar part allowed bookrunners to place a greater amount at a tighter spread than anticipated.

The deal was also ground-breaking because it specifically targeted the growing pool of liquidity in Australia, the first time a UK RMBS master trust had sold a tranche in Australian dollars. This posed legal challenges, because the tranche from an English law RMBS programme needed to be governed by Australian law to be eligible for repo at the Reserve Bank of Australia. In the end, the securities were issued in four other currencies – sterling, euros, dollars, and a Japanese yen private placement following a reverse enquiry.

The commended deals were the UK’s first high-yield whole business securitisation for holidays operator Center Parcs, and the revival of the European market for securitised loans to auto dealers, on behalf of General Motors’ financial arm.