The Banker reviews Europe's best deals of the past year.

Bonds: Corporate

Winner: Danone's €300m social bond

Structuring adviser: Crédit Agricole CIB

Joint bookrunners: Crédit Agricole CIB, Natixis

There were many worthy contenders in Europe for this year’s corporate bond Deal of the Year award, but Danone’s €300m seven-year social bond prevailed thanks to its strong execution and interesting structure.

Investors have shown great interest in social bonds in the past, but they tend to be issued by public sector borrowers rather than corporates. Already unusual in this sense, on March 26, 2018, Danone launched, alongside four other corporate debt issuers.

A day ahead of launch, the company sat down with investors to explain the new structure, as well as the projects eligible for investment under the social bond framework. The bond will work in a similar way to Danone’s existing syndicated €2bn credit facility, which it amended in February to include environmental, social and governance criteria.

The credit line now includes an adjustment mechanism, whereby third-party providers judge the company on sustainability goals. If it outperforms, the coupon will be discounted; if it underperforms then the company needs to pay a premium. 

Initial price guidance on the bonds went out at 45 basis points (bps) above the mid-swap and a 1% coupon. Just after noon, the order book had swelled to €700m and Danone decided to tighten pricing to mid-swaps plus 35bps, with a range of 3bps above or below. Investor demand was such that the issuer was able to price at the very tightest end of the range at mid-swaps plus 32bps, which represents a 13bps or 41% tightening on the initial price talk.

Danone’s bond had the tightest pricing and highest oversubscription rate of the five corporate bonds on the day. French investors in particular were enthusiastic and were allocated 41% of the book, with 25% going to Asian investors and 13% toGerman-speaking European funds.

It was the first bond to be issued by a corporate aligned with the new Social Bond Principles, as set out in June 2017 by the International Capital Market Association. The proceeds from the offering will be put to work in projects promoting positive social impact on Danone’s stakeholders, including responsible farming and agriculture, healthy food entrepreneurship and social inclusiveness.

Bonds: SSA

Winner: Spain's €10bn bond

Bookrunners: BBVA, Citi, Crédit Agricole CIB, HSBC, JPMorgan, Société Générale

Late 2018 was a bad time to come to the primary debt markets and issuers steered well clear. But with medium- and long-term funding needs projected to be north of €125bn, Spain was eager to get an early start on refinancing some of this in 2019. When the market began to recover in January, the country wasted no time in printing its traditional 10-year Eurobond.

However, no one was prepared for the onslaught of demand the issue would excite. Forecasts had predicted European supranational, sub-sovereign and agency bond issuance would stutter in the wake of the central bank’s decision to wind down its bond-buying programme. Nothing could have been further from the truth, as Belgium, Italy, Austria and Spain all attracted record demand in their respective order books.

Spain’s notes stood out from this already exceptional crowd as the deal closed with a whopping €47bn order book on the €10bn deal. It was the largest book ever achieved in the euro-denominated public sector debt market, according to bankers. It was also only the third time that Spain had managed to print such a large amount of debt at once – only pulling off the feat in more supportive market conditions in January of 2014 and 2018.

The transaction priced with 65 basis points (bps) over the mid-swap, implying a re-offer yield of 1.46% and offering a new issue premium of about 3bps over the estimated fair value. The paper, which matures April 2029, carries a 1.45% coupon. Spanish investors had a good showing in the final allocations, taking up more than 20% of the book, with the bulk of the deal ending up in the hands of other European accounts.

By February, the Spanish Treasury had raised more than 15% of its medium- and long-term funding goals for the year, with €20.1bn issued across three transactions. The overwhelming enthusiasm for the bond shows that despite concerns about growth in Europe, investors are still positive about Spain’s economic prospects.

Corporate carveouts

Winner: Bayer’s sale of selected Crop Sciences businesses to BASF

Joint lead financial advisers: Credit Suisse, Bank of America Merrill Lynch

When German chemicals and life sciences giant Bayer first approached US-based crops business Monsanto in 2016, it is probable that it did not foresee a process that would take more than two years to complete. Bayer had to sell off certain Crop Sciences division assets in order to reduce overlap with Monsanto and appease European anti-trust authorities.

Divesting a group of assets is often a long and tricky process – all the more so in this case because the assets were scattered across different parts of the business and spread over Europe and the US. In 2017, Bayer signed an agreement with BASF for the sale of selected crop science businesses worth €5.9bn in total.

The deal would see the transfer of Bayer’s global glufosinate-ammonium business; its cotton, canola and soybean seed assets in Europe and the US; and research and development capabilities. In 2017, these assets generated sales of €1.5bn for Bayer.

However, European merger control authorities remained unconvinced and Bayer had to act fast in order to save the $66bn Monsanto takeover. As a result, BASF and Bayer agreed a second asset sale for an additional €1.7bn, taking the total crop sciences divestment to €7.6bn. 

The smaller deal included Bayer’s global vegetable seeds business, certain seed treatment assets, the research platform for wheat hybrids, digital farming activities, certain other crop protection and seed businesses, as well as three research projects.

The total package sold included 15 different business areas. Furthermore, the separation involved the transfer of the relevant intellectual property rights, facilities and thousands of employees. It was one of the largest carve-outs ever in Germany.

Both transactions closed in August 2018 as Bayer’s acquisition of Monsanto finally went through, with the banks involved pulling off this huge, cross-border and multi-faceted carve-out with urgency. One of the largest ever chemicals deals depended on the tidy execution of the divestment, which was handled swiftly and with great care, according to market watchers.

Equities

Winner: Sika’s SFr1.3bn mandatory convertible bond

Global coordinator: UBS

Joint bookrunners: Citi, UBS

Convertible bonds in Europe had an abysmal year in 2018. Many asset classes struggled, but at least enjoyed some fair weather in the first half of the year. Not so for equity-linked issuance in Europe. The forecast for the first six months of 2019 looks fairly morose as macroeconomic conditions seem unlikely to improve.

Converts offer flexibility for borrowers as they are not put down as debt on the balance sheet, they can be a good diversification tool for investors, and they can provide downside protection for both. But due to continued low interest rates in Europe, issuers have mostly stuck to the straight bond market.

Swiss speciality chemicals business Sika put in a binding offer to acquire Parex from CVC in January 2019. Undaunted by the negative sentiment, it launched a hefty SFr1.3bn ($1.28bn) mandatory corporate bonds offering along with a SFr817m equity placement to facilitate delta hedging. The notes were issued with a 3.75% to 4% initial coupon range and a conversion premium range of 12.5% to 15% and priced on the bottom end of both ranges.

To test the waters ahead of launch, Sika engaged in a wall-crossing exercise for two days with select investors. As a result, the banks were able to build a shadow order book of SFr3.7bn for the bonds and SFr1bn for the equity offering. Bookbuilding started after market close and gathered momentum very quickly. The syndicate sent out a message that the book was covered within 30 minutes. In the end, demand exceeded SFr6bn at an oversubscription level of 4.7 times.

Demand for the bonds outright was so strong that Sika was able to downsize the delta placement from the original projected SFr900m. The shares were sold at a 3.7% discount to previous market close. Many convertible bond funds are not allowed to invest in so-called 'mandys', making the success of this bumper issuance in a short time frame all the more impressive.

The three-year dated paper defers shareholder dilution until maturity, which helps de-risk the takeover. Investors gained exposure to a piece of the equity upside from the merger and acquisition deal in case Sika’s share price rises above the conversion premium range. This was the largest mandatory convertible bond in Switzerland and the second largest convertible, after Sika’s SFr1.65bn May 2018 issuance of vanilla corporate bonds.

FIG financing

Winner: Nationwide's triple-tranche senior non-preferred offering

Global coordinator: UBS

Joint lead managers on triple-tranche new issues: Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Deutsche Bank, JPMorgan, Lloyds Bank, NatWest Markets, UBS

Bank financing was changed fundamentally by the 2007-08 financial crisis, and regulators have spent the past decade establishing legislation to improve market stability and make capital requirements for financial institutions more stringent.

In order to avoid having to use taxpayer money to rescue banks, the EU stipulated that banks must have an extra bail-in debt cushion built in, known as the minimum requirement for own funds and eligible liabilities, or MREL. In order to meet its end-state MREL requirements, Nationwide had to raise capital.

Financial institutions have several debt instruments they can issue, but certain products are off limits. When the UK passed legislation in December 2018 to allow banks and building societies to raise senior non-preferred (SNP) debt, Nationwide Building Society had already issued its first SNP paper in February of that year.

How? Alongside global coordinator UBS, Nationwide structured the bond as a unique interim 'contractual' SNP instrument, the first time this type of transaction was done in the UK. In practice, it means the issued securities were contractually junior to existing senior unsecured and senior to Tier 2 capital. When the law changed, the ranking of these securities automatically aligned to reflect the amended statutory insolvency ranking of senior non-preferred claims.

In anticipation of the offering, Nationwide had amended contractual language in legacy Tier 2 instruments that did not envisage the issuance of SNP through a public consent solicitation process earlier in the month.

The contractual SNP notes were offered in three tranches: €1bn eight-year non-call seven-year, $1bn six-year non-call five-year, $750m 11-year non-call 10-year. Simultaneously, Nationwide launched a broad liability management exercise (LME) for a global cap of £3.25bn ($4.21bn) equivalent of outstanding senior preferred debt in sterling, euros and US dollars. Due to the strong participation in the LME, the cap was raised to £3.97bn-equivalent.

Nationwide managed its liability stack proactively, while harmonising the status provisions across its entire subordinated debt platform.

Green finance

Winner: Garanti Bank's $75m social bond

Issuer and arranger: Garanti Bank

Green bonds have well and truly bedded into the European debt market – sustainable financing is more popular than ever and this trend shows no signs of slowing. Not long ago, green bonds were firmly in the territory of sovereign and government agency institutions and investment grade corporates from developed markets. Over the past couple of years, however, emerging market issuers have stepped up to the plate, leading a great surge of green bond issuance from this corner.

Still a relatively new kid on the block, it is unsurprising some of the most exciting innovation is taking place in green financing. Much of the capital raised is not only being deployed for environmental purposes, but is also put to work on social issues and other areas of sustainable investment.

Turkish private bank Garanti Bank took advantage of the green bond momentum in emerging markets to offer a $75m six-year gender bond in June 2018. The proceeds will be used exclusively to finance loans to female-owned small businesses in Turkey. Over the life of the bond, it is expected to triple the number of loans Garanti makes to female entrepreneurs.

Several eligibility factors will be taken into account when disbursing the bond proceeds, such as how much of the company is owned by women and how many are in executive positions, alongside the traditional parameters, such as the amount of money borrowed, total sales or assets and number of employees.

Garanti cites the 2018 Global Gender Gap report, which found that the gender gap is generally wider in Middle Eastern countries, including Turkey, than on average. Increased awareness for this issue is boosting the number of women in business, however, and the bank sees great scope for this type of financing to grow in its home market. Gender bonds are still relatively rare and Garanti’s is the first private sector gender bond from an emerging market. The bank developed the notes in conjunction with the International Finance Corporation.

High-yield and leveraged finance

Winner: AkzoNobel's Specialty Chemicals €6.5bn-equivalent leveraged buyout financing

Joint global coordinators and physical bookrunners: Barclays, HSBC, JPMorgan

Joint bookrunners and lead arrangers: Bank of China,  BNP Paribas, Citi, Crédit Agricole CIB, Credit Suisse, Deutsche Bank, Mizuho, Morgan Stanley, MUFG, NatWest Markets, Nomura, RBC, Société Générale CIB, UBS

Financial adviser to AkzoNobel: Lazard

One of the big themes to emerge in capital markets in 2018, which is carrying through into 2019, is big take-private transactions. Private equity funds are sitting on mountains of cash just waiting to be deployed and this is often being put to work buying business units carved out from large multinational companies. One of the more intricate and impressive deals in this space was the €10bn sale of AkzoNobel’s Specialty Chemicals business to Carlyle and GIC.

In 2017, AkzoNobel announced the carve-out of its Speciality Chemicals business as a defence strategy against an unsolicited takeover bid from competitor PPG, backed by activist fund Elliott. In order for AkzoNobel to fend off what it considered an opportunistic approach, it set about unlocking value through the demerger. It ran an extensive dual-track process, exploring both a private sale and a public listing, before choosing the all-cash clean-break sale option for the division.

As the largest leveraged buyout (LBO) in the chemicals sector, the acquisition required huge debt financing. The jumbo cross-border financing package launched in September consisted of €5.5bn-equivalent term loans and €1bn in high-yield bonds. Leveraged loans had a very busy first half of 2018, fuelling concerns after the midway point of the year that the market was becoming saturated. But the Specialty Chemicals transactions were so highly anticipated that they proved immune to any negative sentiment and achieved tight pricing on all tranches.

Initially, the company targeted term loans of $3.325bn and €1.79bn, alongside $990m and €485m of senior unsecured loans. Demand was so great that the books across the financing package were substantially oversubscribed. It allowed the banks to downsize the more expensive dollar-denominated high-yield bonds in favour of a larger term loan package.

The dollar debt ended up at $4.34bn for the seven-year senior secured term loans and $605m for the senior unsecured bond. The company also added a €750m equivalent dollar-denominated multi-currency revolving credit facility with a maturity of six years.

Post-demerger and armed with fresh capital, Specialty Chemicals is in a better position to accelerate growth through more focused capital allocation and a tailored strategic plan, say bankers.

Infrastructure and project finance

Winner: Global Infrastructure Partners’ £3.6bn financing for a stake in Hornsea 1 Offshore Wind Project

Co-financial advisers and joint bookrunners: Citi, MUFG

Mandated lead arrangers: ABN Amro, Banca IMI, BNP Paribas, Crédit Agricole CIB, ING, KFW Ipex, Lloyds Bank, Mizuho, Norinchukin, RBS, Santander, Siemens, SMBC, Société Générale CIB

Uncertainty brought on by the UK’s decision in 2016 to leave the EU, and the ensuing political turmoil, has left much of the country’s infrastructure sector in limbo. Questions about future financing and the relationship with the EU going forward have pushed many investors into wait-and-see mode. But Global Infrastructure Partners’ (GIP's) bold move in November 2018 to acquire 50% of the world’s largest offshore wind farm project shows that there are still great deals to be done in the UK.

Hornsea 1, under construction and set for completion in the first half of 2020, will provide clean power for more than 1 million UK homes. It is being built just over 100 kilometres off the East Yorkshire coast. GIP bought half of the project from Danish green energy company Ørsted in the largest ever project financing in the global renewable sector.

To keep down the cost of the debt financing, GIP tasked mandated banks with finding the optimal structure. The transaction was highly complex, including a £1.3bn ($1.68bn) privately placed investment grade project bond, a £1.25bn non-recourse commercial bank financing, a £800m Eksport Kredit Fonden (EKF)-backed financing and a £250m mezzanine facility, for a total project financing of £3.6bn. Each facility was oversubscribed and allowed the banks to push for tight pricing on the various components.

It is difficult to obtain an investment grade rating on a project still under construction. This meant it was important for GIP to access a large pool of institutional investors and to obtain favourable terms.

The £1.3bn notes were placed with 13 North American and UK institutional investors. An important challenge to the transaction are Hornsea’s Consumer Price Index (CPI)-linked revenues under the UK’s contract for difference regime for offshore wind projects. The institutional financing package included £600m CPI-linked long-dated notes to provide a natural hedge alongside a £700m fixed-rate paper.

Loans

Winner: Cineworld's $4.375bn acquisition loan for Regal Entertainment

Joint underwriters: HSBC, Barclays, Investec

Loans has always been one of the most popular categories for the Deals of the Year awards, but 2018 was an exceptionally fertile year for this type of debt issuance. From record-breaking leveraged buyouts to a surge in cross-border mega-mergers, it was a year of bumper debt packages. With interest rates still very low in Europe, issuers have continued to tap the loan market to finance deals.

This year’s winner is UK movie theatre operator Cineworld’s $4.375bn senior facilities to acquire US-based Regal Entertainment for a $6bn all-cash offer. Cineworld also raised $2.3bn in equity capital through a rights issue. The complex cross-border loans package launched in February 2018, in the midst of a big stock market correction.

Initially, the transaction was marketed across three tranches and currencies: $3bn US dollars, $600m-equivalent euros and a $400m-equivalent sterling. Price talk came out at Libor plus 275 basis points (bps), Euribor plus 300bps and Libor plus 350bps, respectively. Investors jumped on the deal, with many putting down triple-digit orders. The dollar tranche was quickly two times oversubscribed, with the euro and sterling loans about three times oversubscribed.

As a result, Cineworld was able to drop the sterling paper in favour of upsizing the dollar and euro tranches, to $3.325bn and $750m equivalent, to optimise the cost of the capital structure. Cineworld was able to tighten pricing on both, to Libor plus 250bps on the dollar loans and Euribor plus 262.5bps on the euro loans.

Due to the aggressive nature of the reverse flex, some accounts reduced the size of their orders or dropped them entirely. Nevertheless, the book ended up twice oversubscribed on both tranches. The company also successfully added a $300m multi-currency revolving credit facility with a five-year tenor.

Despite turbulent market conditions, Cineworld pulled off the tightest debut euro term loan B print for a BBB rated company.

M&A

Winner: Comcast’s $39bn acquisition of Sky

Advisers to Comcast: Bank of America Merrill Lynch, Evercore, Robey Warshaw, Wells Fargo

As any seasoned banker knows, huge cross-border acquisitions are bound to be long and often painful affairs. Few could have predicted a process with more twists and turns, however, than the battle for UK broadcaster Sky. Fox fell foul of UK regulators during both its bids and Disney was angling for a slice of the pie through its takeover of Fox, but in the end Comcast beat the competition with a blockbuster price.

Sky’s takeover saga arguably goes back as far as 2010, when News Corp –before the 2013 split into New Corp and 21st Century Fox – first approached BSkyB and built up a 39.1% stake, but ultimately failed to clinch a deal in the wake of the News of the World phone-hacking scandal. Rupert Murdoch never truly took his eyes off Sky and re-launched a bid for the 61% of the broadcaster’s shares it did not already own. When the European Commission approved the sale in April 2017, it looked like a done deal, until it came under an extended regulatory review by the UK competition authority over concerns surrounding the plurality of British news media.

By late 2017, Disney had made an offer for Fox, which was still in the middle of the Sky takeover bid. In early 2018, Comcast announced a rival offer for Fox shares, prompting Disney to up its initial offer, which was then accepted. By mid-2018, Comcast had dropped its efforts to acquire Fox in order to focus on acquiring Sky.

A bidding war ensued and in September 2018 the UK’s Takeover Panel stepped in and ordered the parties to engage in a rare three-round blind auction process. It was only the fifth such auction to ever take place in the UK. Comcast outbid Disney-Fox with an offer valuing Sky at £30.5bn ($39.5bn), 10% higher than the final counter-offer and nearly double the £18.5bn Fox had initially offered for Sky in 2016.

A few days later, Comcast successfully built a 37.7% stake in Sky (worth £11.2bn) over the course of three days. This prompted Fox to concede and agree to sell its own 39.1% stake in Sky to Comcast, which would then own a controlling 76.8%.

It was a fittingly dramatic ending to one of the UK’s longest running merger and acquisition processes. In one fell swoop, the deal nearly doubled Comcast’s number of direct-to-consumer relationships globally and became an important step in its international strategy into Europe.

Restructuring

Winner: Seadrill’s $12.4bn restructuring

Financial adviser: Moelis & Co, Rothschild & Co

Once one of the world’s leading providers of offshore deepwater drilling services for the oil industry, Seadrill found itself underwater towards the end of 2017. Oil prices had been in steady decline since 2014, slowly eating away at the drilling sector as oil majors aggressively scaled back on exploration and production budgets. In September 2017, Seadrill’s cashflow problems were so severe that it filed for Chapter 11 bankruptcy in the US to reorganise its untenable mountain of debt.

By this time, the company had liabilities to the tune of $8bn of mostly funded debt obligations across 13 bank facilities, three long-term vessel charters, six series of unsecured notes and various derivatives liabilities. Deep-sea oil drilling is a capital-intensive business, so Seadrill urgently required fresh capital to meet some of its contractual obligations. Negotiations with various stakeholders took more than 12 months prior to the Chapter 11 filing.

The reorganisation plan extended impending debt maturities, equitised $2.3bn in unsecured bond obligations and $250m in other claims, and facilitated a $1.08bn capital injection from a group of investors, including Hemen Holding and Centerbridge Partners.

This was done through $880m in new secured notes with a seven-year tenor and a bullet repayment at maturity, alongside a $200m direct equity investment. The equity placement was backstopped by Hemen Holding, which received a 5% of the restructured company’s equity in return for its efforts.

Seadrill’s liabilities had been brought down from $12.4bn to $7.3bn when the company emerged from the Chapter 11 process in July 2018 with a $2.1bn market cap. Amortisation payments have been deferred until 2020 to allow the company some breathing space.

The restructuring is projected to provide a sufficient runway to 2021 when the market is expected to recover, bankers say. A total of $3.75bn of unsecured liabilities were equitised.

Securitisation and structured finance

Winner: UK government's Income Contingent Student Loans 2 securitisation

Sole arranger and joint lead manager: Citi

Joint bookrunners: Bank of America Merrill Lynch, Barclays, JPMorgan

Big public listings or merger and acquisition auctions easily steal the limelight in the capital markets universe, but it is not always where the most exciting innovation happens. Though securitisation on the surface seems simple – grouping together loans to sell as a package with better risk spread – such appearances can be misleading. Structuring packages and making new products by using unusual (and sometimes unorthodox) assets can deliver strategic outcomes for both issuers and investors.

In an attempt to reduce UK government debt and add value for the taxpayer, the government decided to sell student loan-backed securities in several instalments, which are expected to deliver proceeds of £12bn ($15.54bn) over five years. The very first of these, Income Contingent Student Loans 1 (2002-2006), was sold in late 2017 and raised £1.7bn. The government had been working with banks for four-and-a-half years to find an optimal structure for the sale.

The first portfolio sold in late 2017 had a notional value of £3.5bn, but was marked down to £2.6bn on the government’s balance sheet to reflect the fact that they were unlikely to be repaid in full.

Privatising student loans has not been without controversy, with critics saying the government was taking unacceptably high losses on the loans batches. The government’s position is that the securities sale frees up money that has been tied up without serving any policy purpose to be reinvested on the taxpayer’s behalf.

In late 2018, a second transaction of older student loans was launched, Income Contingent Student Loans 2 (2007-2009). The pool was made up for four classes of notes: Class A1 (short-dated, Libor-linked), Class A2 (long-dated, scheduled amortisation), Class B (Retail Price Index-linked) and Class X (back-dated). The investors targeted by the different tranches were traditional asset-backed security investors, insurers, pension funds looking to match inflation-linked liabilities, and asset managers looking for a levered exposure to the residual cashflows of the underlying assets, respectively.

Despite a big drop in market sentiment and heightened concerns of a fast-approaching Brexit in December 2018, the books filled up quickly. The first three tranches were between 1.3 times and 1.6 times oversubscribed, with Class X ending up 2.1 times oversubscribed. The sale raised £1.9bn and the loans had a face value of £3.7bn. 

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