The first few months of 2010 have seen corporate bond issuance drop off dramatically, compared to a record 2009. UK sterling corporate issuances have perhaps been hit the hardest.
Total corporate issuance has slumped by about 75% year-on-year according to some estimates and, as The Banker went to press, there had been just 15 corporate deals denominated in sterling this year.
So what was the motivation for a Danish energy company to abandon its traditional euro funding base and tap an entirely new set of investors for an inaugural sterling issue? Dong Energy, which is rated A- with a 'stable' outlook by Standard & Poor's and Baa1 with a 'stable' outlook by Moody's, launched its £500m ($764m) 30-year bond in March 2010. It hired Barclays Capital, Deutsche Bank and Société Générale Corporate & Investment Banking (SGCIB) to act as joint bookrunners.
Carsten Thomsen, CFO at Dong Energy, was impressed by the way in which the bank group handled the roadshow. "The bankers assured us there would be good demand out there [for a sterling issue] and it turned out to be true," he says.
Brendon Moran, regional co-head of northern Europe, global capital markets, for SGCIB explains that one of the reasons Dong Energy chose to raise the money in sterling was that issuance in this currency had been much thinner on the ground than in other currencies, such as dollars and euros, and so it was felt there would be strong demand.
"You've had a backdrop of investors who were starved of sterling supply and who were looking for opportunities to put their money to work," he says.
Seeing sense
In terms of Dong Energy's strategy, a sterling issue makes complete sense. The company has grand plans for its strategy in the UK and will need long-term funding in sterling in order to carry them out. "We are getting more and more assets in the UK. We are developing offshore wind farms and building a gas-fired power plant in [the] Severn [valley] in Wales. We are also active in developing our gas and oil discoveries in the west of Shetland," Mr Thomsen says.
"This is all in the sterling area so it makes good sense to do some funding in sterling also. At the same time we are a company that has assets with a long life so it made sense to have some of the funding with a long maturity, and this you can do more easily in sterling than in the Eurobond market."
Diversification play
The deal exceeded expectations and was oversubscribed by almost four times. "It was done within a few hours," says Mr Thomsen. "The banks had done their homework and we had a good story to tell."
The deal pays a coupon of 5.7% and priced at 118 basis points over gilts, which was in line with expectations. It attracted a book of nearly £2bn from 107 investors. Most of these investors were real money, high-quality investors, according to Mr Moran, with 43% of the book allocated to fund managers and 48% to pension funds and insurance companies. The remainder of the paper was taken by banks. "Dong really gave them a diversification play for what I think is a well regarded and very well-run company," says Mr Moran.
Right on time
In terms of the deal's timing, Mr Thomsen says it had nothing to do with an urgent need for funding right away. It was an opportunistic play. "We thought it was a good time with a low absolute interest rate level and also low credit margins. We are pre-funding our business in 2011," he says.
Mr Moran agrees. "This deal was opportunistic. It saw a trade that could be achieved at very competitive levels and went ahead," he says.
Dong Energy is based in Denmark and has 6000 employees. It generated just under DKr50bn ($9bn) in revenue in 2009 and now plans to expand its operations in the UK, in particular renewable energy.
"We see north-west Europe as our natural geographic footprint and we are changing our strategy to have more renewable energy," says Mr Thomsen. "We have a lot of experience offshore with wind farms and we think the UK is [a] favourable [market] at the moment."
