Oil and gas multinational BG Group has a strong credit record, but it was still a brave decision to launch an unusual structure just after the Greek elections with an extra tranche added to target Asian private bank clients.
BG Group is a well-known, well-regarded company which has enjoyed a single A credit rating for many years. But the oil and gas multinational has a hefty capital expenditure programme planned, and is expecting to spend $23.5bn in 2012 and 2013 on projects around the world, particularly in Brazil and Australia.
The extent of this investment programme was in danger of putting BG’s credit rating under threat so the group decided to take action. A variety of initiatives followed and in June 2012, BG accessed the hybrid bond market with a $2bn multi-tranche issue, maturing in 2072 and paying a 6.5% coupon.
“We have made good progress across a number of diversified funding streams, including the debt capital markets, export credit agencies and a $5bn portfolio rationalisation programme. The hybrid bond issue is another part of this strategy, further strengthening our capital structure and increasing diversification of funding types ahead of this period of significant investment. Our rating has recently been reaffirmed by all three credit agencies at mid-single A, but we are looking to proactively strengthen our balance sheet ahead of this period of significant investment,“ says Pedro Zinner, head of treasury at BG.
New model
Hybrid bonds have been a feature of the capital markets for some time but BG was only the third UK corporate to have tested this asset class. Not only are the bonds significantly longer dated than most fixed-income products, but they are also deeply subordinated, ranking just above BG’s equity in its capital structure. The generous coupon may be deferred indefinitely as well, if the company is under stress. These features are designed to give the bonds certain equity characteristics so they receive 50% equity credit from the credit rating agencies. In other words, the transaction is perceived to bolster BG’s capital strength by $1bn.
“The inclusion of features which are not present in senior debt, such as potential coupon deferral, subordination and long tenor, require additional compensation, but we believe that this is acceptable in the context of achieving our overall objectives of strengthening the balance sheet, diversifying our types of funding and pro-actively supporting our credit ratings. And maintaining balance sheet strength and flexibility is clearly in the interests of our shareholders too,” says Mr Zinner.
In today’s troubled macroeconomic environment, the primary markets are deeply volatile, even for plain vanilla transactions. But a multi-tranche hybrid deal could be considered especially challenging. BG pursues an active investor relations programme, however, which is of particular benefit in current conditions.
As Mr Zinner explains: “A close relationship and ongoing dialogue with our investors is vital, and is something which we work hard to foster. The success of this issue further reinforced the importance of this relationship.”
Political influence
The BG deal was launched on June 18, 2012, just a day after the Greek legislative elections. Preparations began in earnest several weeks earlier with the transaction’s bookrunners, BNP Paribas, Barclays, Deutsche Bank and RBS. BNP and RBS acted as structuring advisors while Barclays and Deutsche focused on marketing and distribution.
“We have a strong and supportive group of relationship banks, and the bookrunners were selected from this group with an eye to previous hybrid experience and geography of issuing markets,” says Mr Zinner.
In the days before the deal, BG embarked on an ambitious roadshow, encompassing cities across Europe and Asia. Investors were anxious to understand as much as they could about the hybrid structure and many were keen to gain reassurance about BG as a credit too. Providing comfort to them and BG, the bonds are callable in 2017, 2022 and every coupon payment date thereafter. And, as BG is expected to reap the benefits of its investment programme from around 2015, most bondholders were encouraged to treat the bonds as five-and-a-half-year instruments.
Fortunately for BG, the Greek election results were deemed to be positive by the markets, which opened strongly on June 18. The company duly launched its transaction issuing a £600m ($925m) tranche in the UK and a €500m ($609m) tranche in mainland Europe.
“Our two-pronged roadshow in Europe and Asia had a very positive response from investors, and having identified a suitable issuance window on the Monday following the Greek elections, when the markets opened strongly, we moved quickly to announce the dual tranche sterling and euro transaction. As the relatively benign market environment continued, a decision was made two days later to announce a further US dollar tranche at Asia market opening,” says Mr Zinner.
Overnight success
For most European institutions, investing in a credit as solid as BG and receiving a 6.5% coupon made the bonds extremely attractive. In Asia, however, the bookrunners were targeting a number of private banks and high-net-worth individuals, who are normally reluctant to invest in bonds with a coupon of less than 7%.
The $500m Asian tranche opened on June 20, and initial guidance suggested a coupon of 6.75% to 7%. But as Europe slept, orders piled in and by the time Europe got to work, the book had grown to $2bn. The bonds were also marketed in Switzerland, where the book swelled even further. Ultimately, BG was able to price its bonds at 6.5% in Asia too.
“The success of the book-build demonstrated the importance of a clear dialogue with investors, and good judgement by the lead manager group. We achieved the size of deal which we had targeted and the yield was at the tight end of original expectations when the deal was in the planning stages,” says Mr Zinner.
