Acergy is in sparkling form. After rationalising its business, renaming itself and emerging from crisis it has been listed on Nasdaq. Edward Russell-Walling reports on how it is managing its debt with convertibles.
For a company with a past, the convertibles market can be more welcoming than the straight bond market. While bond buyers are obsessed with history, convertibles investors are more inclined to look to the future, as offshore engineer Acergy discovered recently when it sold $500m of convertible notes.
Acergy is definitely a company with a past. It is an engineering and construction contractor for the offshore oil and gas industry – “from seabed to surface”, as it puts it. With a market capitalisation of over $3bn, it has some 7000 employees, and did most of the installation work on the Norway to Britain Langeled undersea pipeline, the world’s longest.
In its previous incarnation as Stolt Offshore, however, it grew too rapidly by acquisition during the 1990s, and found itself in deep water in more ways than one. It has since rationalised its business, emerged from crisis, renamed itself and been listed on the Oslo Stock Exchange and Nasdaq. Its latest quarterly results show a business back on increasingly sparkling form.
The stress-free state induced by cash
During its reconstruction phase, the company pulled together all its bilateral debt into a single syndicated, secured $350m revolving loan facility. This has since been paid down and Acergy has been sitting on net cash. In August the facility was amended, with the security falling away, the term reset to five years and the size increased to $400m.
Earlier, in the stress-free state that cash induces, the company chose to review its finances. Its room to manoeuvre has been helped by the buoyant conditions prevailing in its industry. High oil prices have prompted many of its customers to develop more offshore oilfields and demand for its services is strong.
“Before the convertible issue, we had no debt,” says David Rooke, Acergy’s head of corporate finance. “At the start of 2006 we looked at the cashflow position and decided to review the capital structure. We considered ways of returning value to shareholders by reintroducing debt to our capital mix.”
The company carried out an internal evaluation of various possibilities, including the syndicated loan market, the public bond market, private placement and term loan structures. But it was an idea for a convertible issue brought to Acergy by UBS and Lehman Brothers that won the day. The idea was hard to resist, since it meant effectively selling the company’s shares (and their high volatility) at a premium and using the money to buy them back at market price – and paying a very low rate of interest for use of the funds.
“This was the company’s first public debt issuance and convertibles are relatively complicated to understand,” Mr Rooke says. “But the pricing was compelling, and through the summer the board and senior management grew more comfortable with the idea. They realised that this was cheap financing for us and that the opportunity might not be there for ever.”
An added attraction of the convertible route was the attitude of investors when it came to valuation.
“One of our concerns about the bond market was that it was very backward-looking,” says Mr Rooke.
“We consider our business to be completely recovered, but the bond market was penalising us. The convertibles market, because of its equity flavour, is more forward-looking.”
Launching the deal
The deal launched in September by bookrunners Lehman Brothers and UBS was a $435m issue with a $65m option to increase. “We had looked at a smaller transaction,” says Mr Rooke. “But in terms of what we wanted to do, a bigger issue made more sense. And from an investor perspective, in a large issue the liquidity is better.”
Shareholders had approved a buy-back of up to $300m at the company’s latest annual general meeting and, as it launched the issue, Acergy said it might use part of the proceeds to buy in up to 10% of its issued share capital.
It also intends to use some of the funds to upgrade and rejuvenate its fleet. It has never paid a dividend, and that too is now under consideration.
The deal was several times oversubscribed and closed with a coupon of 2.25%, in the middle of the marketing range of 2% to 2.5%. The conversion premium was 43%, against a range of 40% to 45%, and the option to increase was fully exercised. The notes, convertible into just under 11% of the issued share capital, mature in 2013. “We were keen to push the maturity out beyond a plain vanilla five-year term, so that the convertibles don’t fall due at the same time as our loan facility,” Mr Rooke explains.
