Corus of approval as bond issue is deemed a success

Such was the demand for the seven-year B3/B- bonds, with their 7.5% coupon, that Corus raised the issue size from E500m to E600m. It then returned to tap the market a second time for another E200m at a premium, effectively squeezing the coupon down to 6.375%. The sole bookrunner was CSFB, with HSBC, ABN AMRO and ING as lead managers.

“It was a phenomenal success,” says Corus finance director David Lloyd. “The 7.5% coupon achieved was the lowest in the history of the London market for a B- credit.”

The success was all the sweeter because the company had tried to issue a bond in May, only to pull it “as market conditions deteriorated”. Conditions took a dive and, although several other would-be issuers withdrew offerings at the same time, the market’s perception of Corus was not a positive one.

Difficult merger

Steel is the quintessential cyclical industry. And when British Steel and Holland’s Hoogovens merged to form Corus in 1999, it more or less coincided with the start of the down cycle. Prices began a fall from which they have only recently recovered. To aggravate matters, welding the two organisations together proved more painful than expected.

In September, however, Corus’s latest interim results laid most doubts to rest. Reorganisation and restructuring, coupled with a 50% hike in steel prices this year, are transforming its performance. Against a backdrop of Ł2bn in accumulated losses between 2000 and 2003, the company announced its first retained profit since the merger.

This improved outlook and the September bond offer’s sharp timing – on the heels of the results and at the end of the summer lull – were enough to tempt the market’s appetite. The proceeds are being used to fund a tender offer for a E400m bond, which matures in 2006, with the balance paying down revolving credit drawings.

Funding source

“For working capital and general finance, the bank market remains the principal source of funding,” Mr Lloyd explains, adding that working capital needs fluctuate significantly during the course of the business cycle.

In 2001, Corus secured a E2.4bn syndicated bank facility to replace pre-merger lines of credit. In mid-2003, as news from the company worsened, the facility was halved. Today, although largely undrawn, the facility is being renegotiated on substantially improved terms.

Mr Lloyd accepts, however, that there has been a need to diversify sources of funding. In the old days, he says, British Steel was like a banker, with a Ł1bn cash pile at the top of the cycle, dwindling to zero at the bottom, when the whole process started over again. The merger, which involved paying a large special dividend, led to a much more geared entity: gearing was 43% (at the low end of the range for EU steel companies) at end-June, with a target of 30% averaged over the cycle, Mr Lloyd reports.

In January 2002, a convertible bond issue raised E307m. The sale of a minority stake in a stainless steel venture raised another E555m. At the end of 2003, a 5-for-12 share placing – which helped to bolster the market’s view of Corus – netted E291m.

“Access to the bond markets is essential for Corus, given the size of our capital expenditure and the long-life nature of our asset base,” Mr Lloyd says. “But tapping the markets by such a cyclical borrower must involve a degree of opportunism. We’ll go when the market conditions are right.”

Extending debt profile

This year, the emphasis has been on extending the debt’s maturity profile, hence the bond issue and tender offer. A Ł215m receivables securitisation programme set up in 2002, due to mature in 2007, has been increased to Ł275m and had its maturity extended to 2009.

All that remains now is for Corus’s credit rating to catch up with the implied view of the marketplace. Downgraded to non-investment grade status in 2002, its debt was upgraded on the back of the 2004 interims. Current bond spreads and credit default swap prices, however, suggest that another upwards notch might be in order.