Deals of the Year 2014 – Europe

Bonds: corporates 

WINNER: EDF $12.6bn of senior and hybrid bonds

Bookrunners: Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Mizuho, Morgan Stanley, RBC Capital Markets, Royal Bank of Scotland, Société Générale

The week of January 13, 2014, was a particularly busy one for French utility EDF’s treasury team. It will also go down as a memorable one for all the right reasons. 

The state-owned company, which has high credit ratings of Aa3, A+ and A+ from Moody’s, Standard & Poor’s and Fitch, respectively, decided to start the year off with a bang. It entered the capital markets with the aim of raising senior and hybrid debt in euros, dollars and sterling.

EDF has a big capital expenditure programme and also had bond redemptions due later in 2014. A key objective for it was not just to issue a significant amount, but lengthen the average maturity of its debt – it has to match the long lead times of its industrial projects with long liabilities – without increasing its average interest rates much.

On the first day of the week, it managed to sell $4.7bn of senior dollar bonds in its first foray into that segment of the capital markets for four years. It sold tranches of three years, five years and 30 years. Particularly impressively, it also issued a $700m 100-year tranche that yielded just 6.2% despite its ultra-long tenor. It was the first 100-year dollar bond from a European corporate borrower in more than 15 years.

In the following two days, EDF ventured into the hybrid market, selling subordinated bonds of $1.5bn, E2bn and £750m ($1.3bn).

EDF took a break on the Thursday, but returned to the market on Friday, January 17 with a spectacular 100-year senior sterling bond of £1.35bn. It was the first ever century bond in the currency, with no sovereigns, including the UK, having attempted one previously.

With all the bonds issued in the week, EDF managed to lengthen the average life of its debt by 3.4 years while not increasing its average coupon.

Bonds: SSAs 

WINNER: National Treasury Management Agency of Ireland €5bn bond

Bookrunners: Barclays, Danske Bank, Davy, Goldman Sachs, HSBC, Nomura

HIGHLY COMMENDED: Spain €10bn bond

Most of the past six years have been a rough time for Ireland and its economy. The nadir came in November 2010, when it was forced into an €85bn bailout from the European Central Bank, the EU and the International Monetary Fund. 

But in March 2013, the country signalled its economic recovery when it issued a €5bn 10-year bond in its first foray into the capital markets since it withdrew in early 2010.

The transaction was a critical step towards Ireland exiting its bailout programme, which it went on to do in December 2013, ahead of all the other eurozone sovereigns that had been rescued – Cyprus, Greece and Portugal.  It also went a long way towards convincing European politicians that their support measures for Ireland had worked.

Having mandated Barclays, Danske Bank, Davy, Goldman Sachs, HSBC and Nomura to manage the bond, Ireland announced a deal via its National Treasury Management Agency on March 12. Following strong feedback from investors, it entered the market the next day.

Initial pricing talk was of 250 basis points (bps) over mid-swaps, which are used as the pricing benchmark for euro-denominated bonds. At that level, Ireland was offering a premium over its existing bond curve of 10bps. But after just one hour, the order book totalled E6bn, allowing the bookrunners to tighten price guidance to 245bps over mid-swaps.

By 11.15am, the book reached €13bn, which enabled the sovereign to issue a larger than expected deal of €5bn priced at 240bps, flat to its curve. The yield was 4.15%, about 265bps wider than Germany’s equivalent bonds at the time.

The bond was bought by almost 400 investors, the bulk of them from Europe. It has performed strongly in the secondary market, trading with a yield of about 3% in February this year. Bankers on the deal said it helped not only to bolster confidence in Ireland’s financial position, but that of the eurozone as a whole.

Equities 

WINNER: CTT Correios de Portugal €579m IPO

Bookrunners: CaixaBI, JPMorgan

HIGHLY COMMENDED: Tinkoff Credit Systems $1.1bn IPO

Good news about Portugal’s economy has been in short supply since the start of the global financial crisis in 2008. The southern European country agreed a €78bn bailout with the EU and International Monetary Fund in May 2011 as its finances went into a tailspin and its prospects of turning to the capital markets for funding became ever more remote. 

Last year marked the country’s economic turnaround. While its gross domestic product contracted over the whole of 2013, there were increasing signs of a recovery, to the extent that it is expected to grow this year, rather than shrink.

A big signal of renewed confidence came in December 2013, when CTT Correios de Portugal, a state-owned postal company founded in 1520, raised €579m in a highly successful initial public offering (IPO), the country’s first since 2008.

CaixaBI and JPMorgan led CTT’s deal. They had the task of selling 70% of the company in a process that the Portuguese government initiated to comply with the bailout terms that it dispose of some assets.

The price range for the IPO was set at €4.10 to €5.52. Such was the demand that the bookrunners were able to price the deal at the top of the range, valuing CTT at E828m and giving Portuguese taxpayers good value for money. One-fifth of the 105 million shares on offer were sold to retail investors, while the rest went to institutional buyers. Among the latter group were investors from the US, the UK, Germany, Switzerland, Spain, Italy and Denmark.

CTT’s shares have performed strongly since the IPO, testifying to both the company’s strength and the improving state of Portugal’s economy. By the end of December, the stock was trading at €5.59. It has since climbed further and was quoted at €7.71 in mid-April.

FIG capital raising 

WINNER: NIBC €500m covered bond

Bookrunners: Credit Suisse, LBBW, NIBC, Royal Bank of Scotland

HIGHLY COMMENDED: BBVA $1.5bn additional Tier 1 bond

The world’s biggest banks have spent much of the past five years trying to comply with new regulations. Many of them have had to come up with innovative ways of raising funding that allows them to meet new rules and also satisfy the changed demands of investors following the global financial crisis.

Most of those efforts have centred on the unsecured funding markets. But Dutch financial group NIBC, whose owners include JC Flowers, the US private equity firm, brought innovation to the centuries-old European covered bond market in October last year when it did a deal with a new type of structure.

NIBC’s conditional pass-through covered bond was a complex instrument. But it essentially differed from conventional covered bonds, which are backed by pools of high-quality mortgages and are deemed to be among the safest types of fixed-income instruments, in terms of what happens in the unlikely event that the borrower defaults. In that scenario, NIBC’s bond can be extended by as many as 32 years, giving investors a longer time to be paid and increasing the likelihood of them getting their money back.

The advantage to NIBC was that while its normal covered bonds have A+ ratings, its pass-through one got a top level AAA rating, allowing it to pay a lower coupon.

NIBC’s innovation proved highly popular with the market. Within two hours of the five-year deal being launched, €1.3bn of orders had been placed. This enabled the bookrunners – Credit Suisse, LBBW, NIBC and Royal Bank of Scotland – to price a €500m note at mid-swaps plus 50 basis points (bps), which was 10bps to 15bps tighter than where a new conventional covered bond would have been issued.

Such was its success that NIBC sold a second conditional pass-through covered bond in April this year. It was similarly well received by covered bond investors, many of which hope other borrowers follow NIBC’s lead and also opt for this structure.

Infrastructure and project finance 

WINNER: Elenia €500m whole business securitisation

Bookrunner: Crédit Agricole, HSBC, RBC Capital Markets, Royal Bank of Scotland

HIGHLY COMMENDED: Greater Gabbard OFTO £305m project bond

Finnish electricity and heating distributor Elenia came to the capital markets last year hoping to raise a large amount of debt. But rather than issuing a straight corporate bond, which would have perhaps been the more straightforward choice, it opted to sell its securities from a new €3bn whole business securitisation (WBS) debt platform. 

But the company’s decision paid off. Such was the demand for its seven-year deal, rated BBB by Standard & Poor’s, that it managed to issue E500m just one day after going on a roadshow on December 9. The order book totalled €1.25bn, with many of the investors coming from the UK.

The bonds are secured against two core businesses: Elenia Oy, which distributes power, and Elenia Lampo Oy, which focuses on heating.

Elenia’s deal was innovative because of the fact that so few mainland European utilities had issued WBS bonds before. Even previous ones from UK utilities, which have sold WBS debt fairly frequently over the past decade, were not thought to be solid comparables for Elenia, given that they came under a significantly different legal system to Finland’s.

Bankers say the success of Elenia’s landmark deal could change the way European utilities fund themselves in future. It has shed a light on how WBS structures can protect investors and potentially allow for a bond rating uplift.

Like Elenia, which has been owned by a group of private equity firms since being sold by Vattenfall in 2012, some European utilities might now be tempted by WBS transactions, rather than always raising money through their parent companies on a standalone basis. Given that Elenia has taken a pioneering path, bankers believe its European peers should be able to follow suit easily.

Islamic finance 

WINNER: Istanbul International Finance Centre Tl100m project sukuk

Bookrunner: Aktif Bank

The Istanbul International Financial Centre (IIFC) project is one of the most ambitious elements of Turkey’s economic policy. Aktif Bank helped turn the financing of the construction phase into an opportunity to put the IIFC on the map before it has even been built.

In May 2013, Aktif was the sole arranger on an issue of sharia-compliant project notes (sukuk) for Tl100m ($47.02m), to finance real estate developer Agaoglu, which will construct the IIFC. The Turkish government is keen to establish the country as a centre for Islamic finance alongside the IIFC initiative, and passed enabling legislation for sukuk issues in 2011. Since then, the sovereign and several banks have issued sukuk, but this was the first sharia-compliant deal in Turkey structured around the cash flows from an infrastructure project.

Islamic finance has a potentially strong domestic market among Turkey’s 76 million population, and it can also attract investment from the cash-rich Gulf states. The IIFC deal was three times oversubscribed within a day, at a profit rate of 8.75% for a one-year zero-coupon note.

The issue used a mudaraba (partnership) structure, in which the IIFC project company leases land from a special-purpose vehicle (SPV) financed by investors. The project company will then transfer 90% of projected profits to the asset-leasing vehicle to pay investors. The 10% overcollateralisation provides security for investors. As an added protection, the project company undertook to buy the property outright from the SPV in the event of significant market risk, provided the project has sufficient underlying cash flows.

The deal was replicated using a structural variation in November 2013, again for a one-year Tl100m issue. This time, the structure was a wakalah sukuk in which the project company manages assets on behalf of the sukuk investors. The yield was significantly higher due to the rise in emerging market and Turkey-specific risk premia, but the deal was still oversubscribed at a time when other Turkish issuers cancelled offerings altogether. Aktif is in discussion with other construction companies about similar deals. 

Loans 

WINNER: PPF Arena2 €2.28bn acquisition loan

Mandated lead arrangers: Banca IMI, Bank of China, BNP Paribas, Ceska sporitelna, Citi, Commerzbank, Crédit Agricole, Deutsche Bank, ING, KBC, Raiffeisen Bank International, Royal Bank of Scotland, Sberbank, Société Générale, UniCredit

HIGHLY COMMENDED: Joh A Benckiser €3bn acquisition loan

PPF Group, owned by Czech billionaire Petr Kellner, is a familiar name with a strong reputation for successful investments in central and eastern Europe. Even so, the facility agreed in November 2013 to finance PPF’s acquisition of 67% of Spanish group Telefonica’s Czech subsidiary was an impressive achievement for the mandated lead arrangers.

As a telecom company with mostly local currency revenues, the acquisition needed funding in Czech koruna as far as possible. The original target was 50:50 koruna to euros, with the flexibility to scale up the koruna tranche depending on demand.

In the event, Société Générale – which has a local subsidiary, Komercni banka – brought in seven other underwriters, while the syndication found 13 banks in total, including six with an on-the-ground presence in the Czech Republic.

That meant the loan was 30% oversubscribed, allowing underwriters to scale back their commitments to well within their risk limits. The syndication was completed in just four weeks, with a structure that gave the borrower maximum flexibility. There were three tranches of three-, four- and five-year maturities, respectively, plus a five-year revolving credit facility for the equivalent of €100m. The longer tranches will be drawn first, so if the mandatory tender offer by PPF to buy out the rest of Telefonica Czech Republic is not fully taken up, the loan will be predominantly a five-year maturity. 

Careful management of the syndication process encouraged banks to take the loan in koruna, with the result that the koruna element is to rise to 93% of the overall €2.28bn equivalent four-tranche loan package (including a revolving credit facility). This made the deal the largest ever syndicated loan in Czech koruna, and the largest acquisition loan ever in the Czech market.

M&A 

WINNER: Grohe €3.1bn takeover by Lixil and Development Bank of Japan

Advisors to Bank of Lixil and Development Bank of Japan: BNP Paribas, Moelis, SMBC

Advisors to Grohe: Credit Suisse, Goldman Sachs, Morgan Stanley

Lixil has long sought to boost its international business. The Japanese building materials and housing equipment company, which has annual sales of almost €12bn, made about 85% of its revenues in its home market last year. But given Japan’s slow economic growth, it recently set out to boost its foreign sales from €1.5bn to €7bn by 2016.

Lixil took a major first step towards achieving this goal when it teamed up with Development Bank of Japan (DBJ) and reached an agreement in September 2013 to buy 87.5% of Germany’s Grohe from two private equity groups. The €3.1bn deal was the result of two years of extensive preparation by Lixil and its advisors.

The takeover, which was closed in January this year, was notable for a number of reasons. It was the largest ever direct investment by a Japanese company in Germany. It was also the biggest German private equity deal of 2013.

It was a complicated transaction, too. Lixil had to negotiate with the 12.5% minority partner, a Chinese company, and convince it of the merits of collaborating with Japanese buyers. Moreover, Grohe owned a controlling stake in Joyou, a firm listed on the Frankfurt Stock Exchange. This meant Lixil and DBJ had to launch a tender offer for Joyou upon the agreement of their takeover of Grohe.

But perhaps the biggest hurdle was convincing the sellers not to proceed with an initial public offering of Grohe, which they were thinking of doing. Lixil and DBJ had to move quickly as a result. But they managed to get a deal done just two months after submitting an indicative offer to the private equity owners.

Bankers believe the takeover sets an exciting precedent and could encourage other Japanese companies to invest in Europe’s recovering economy.

Real estate finance

WINNER: Gallerie €363m commercial mortgage-backed securities

Bookrunner: Goldman Sachs

HIGHLY COMMENDED: Project Hampton €675m pan-European financing

Goldman Sachs pioneered a viable post-crisis commercial mortgage-backed securities (CMBS) structure with deals for retail giant Tesco in the UK. In November 2013, it applied the model in Italy, which had not seen CMBS issuance since 2006. 

As sole bookrunner and arranger, Goldman enabled securitised financing of a real estate fund that manages a portfolio of properties jointly owned by a Morgan Stanley real estate fund and Gallerie Commerciali Italia, the local subsidiary of French retail giant Auchan. In a similar style to the Tesco deals in the UK, the underlying properties are shopping centres in which Auchan hypermarkets are the anchor tenants.

With Morgan Stanley as the portfolio manager, the fund acquired 13 shopping centres and two retail parks, split 50:50 between southern and northern/central Italy. Goldman Sachs provided the secured financing at a loan-to-value ratio of 58%, and this was then packaged into the CMBS notes with a legal maturity of 2025 and an expected maturity of 2018. To align the interests of the arranger and investors, Goldman will retain 5% of each of the three tranches, which together had a weighted average coupon of 2.65%. Since the Goldman loan was made at 525 basis points over the three-month euro interbank offered rate (Euribor), this built in a significant margin for the US investment bank, confirming viable economics for the CMBS market in Italy.

The highly commended deal was the financing of private debt investor Cerberus’s acquisition of the Project Hampton real estate loan portfolio from the UK’s Lloyds Bank in December 2013. Credit Suisse was the sole lender for the deal, on a portfolio of 240 properties across 11 European countries. This was the largest portfolio acquisition financing of 2013 in Europe, and the complexity of the pan-European profile paves the way for other major sell-downs. Commercial real estate lending is the main asset identified by many European banks as non-core to assist their deleveraging – Germany’s Eurohypo is currently looking to sell €5bn in Spanish real estate debt.

Restructuring 

WINNER: Hime-Saur €2.7bn restructuring

Advisors to creditor coordinating committee: Gleacher Shacklock, Banca Leonardo

France’s third largest water utility, a staff of more than 12,000 at a time of high unemployment, and an ownership structure that included the French state strategic investment fund and a private equity firm. These were ingredients that all made a lender-led restructuring a difficult prospect. Throw in three takeover bids including two of the existing shareholders, and a complex court-mandated process, and any deal that favours creditors looked very challenging. 

But boutique firms Gleacher Shacklock and Banca Leonardo proposed and steered through a restructuring that saw senior lenders take 100% control of Hime-Saur in October 2013, eliminating existing shareholders including the French state. This is the first major senior lender-led deal in France that involved squeezing out shareholders.

The creditor committee itself was a disparate group including banks from France, the UK and Japan, plus a distressed debt fund that bought in part of the way through the process. The debts were a mix of loans and a large out-of-the-money swap transaction. Within weeks of senior lenders appointing the two advisors, Hime-Saur was already in a legal process called mandat ad-hoc, which then turned into a process called conciliation after a payment default. The government engaged an interministerial industrial restructuring committee as well. Consequently, creditors were required to negotiate with numerous stakeholders using a legal process that changed part-way through, and shareholder approval was needed for the deal.

Both the company and the court-appointed conciliators favoured acquisition by a French buyer that would leave minimum debt on the balance sheet. But that would mean a low purchase valuation that would damage creditors. Gleacher Shacklock and Leonardo had to prove that senior lenders could do a better deal, which was no easy task as the company’s business model was unclear and its competitive landscape changing.

The lenders’ advisors instead pushed for a creditor takeover, and used the presence of two French banks on the creditor committee as a bargaining tool. BNP Paribas and Natixis agreed to a share lock-up, so that they would become anchor investors in the restructured company to reassure the company and French government. 

Securitisation 

WINNER: Co-Trax Finance II-1

Lead manager: Commerzbank

HIGHLY COMMENDED: Taurus 2013 commercial mortgage-backed securities

During 2013, banks were fretting that trade finance would receive a relatively punitive treatment under the Basel leverage ratio. This is a comparatively low-risk asset class, and a valuable one for client relationships, so banks needed to find a way to preserve the business without breaking the balance sheet. A further complication for eurozone banks is that most of global trade is conducted in dollars. That means European banks have to come up with dollar liquidity that can slip away – as it did at the height of the eurozone crisis in 2011. 

Several banks began to experiment with securitising trade finance assets, but Commerz-bank’s $22m mezzanine deal was perhaps the most innovative example in 2013. It used a synthetic structure – selling the risk to receive Basel capital relief without a true sale of the assets. And the assets were purely trade-related financing extended to other financial institutions, the first time such a structure had been used in the synthetic market.

The reference pool consisted of about 160 transactions across 80 debtors, with 23% coming from Brazil, 22% from China, 12% from Panama, 7% from Russia and the rest from 12 different countries. This diversity reassured potential institutional investors, resulting in a competitive bidding process and a favourable price. The small size was intended to test the water, with a potential portfolio of $500m ready to securitise for future deals.

The highly commended deal was the Taurus €1.075bn commercial mortgage-backed securities (CMBS) issue. This was the first fully syndicated public CMBS in Europe since the financial crisis. The underlying asset was a loan to German multi-family residential developer Gagfah by Bank of America Merrill Lynch (BAML), refinancing two previous CMBS deals. BAML was sole arranger and joint lead manager alongside HSBC, and the transaction was about 2.5 times oversubscribed on average across the tranches, with 40 investors participating. That strong reception paved the way for two similar Gagfah CMBS during 2013, allowing the company to refinance a total of €4bn for the year as a whole.