When triple A rated GECC decided to issue a 32-year subordinated note, it chose UBS to ensure the success of this groundbreaking deal. Nick Kochan reports.

After burning the midnight oil in Stamford, Connecticut, the strong coffee was flowing in the offices of UBS and Merrill Lynch in the early hours of September 5. For the funding department at GECC and the debt management departments at UBS and Merrill Lynch in London were beginning the most intense part of their campaign to sell investors a 32-year subordinated note.

Unprecedented issue

The deal was pivotal. GECC had never issued subordinated debt in sterling before or in such large size in any single transaction. How would investors respond? How would GECC explain the reasons for this unprecedented issue? Would concern about the issue detract from the demand? Such was the importance of the moment that GECC decided to take charge of giving its message directly to investors. This critical role fell to Kitty Yoh, deputy treasurer and head of long-term funding at GECC, who would host the international call from its offices in the US.

Issuing subordinated debt could potentially be misinterpreted as an attempt to shore up the balance sheet and the rating. It was a misconception that the lead managers and GECC were anxious to dismiss. They were keen to say that the deal itself was groundbreaking and innovative, but the logic was extremely simple: GECC was replacing one form of capital with another similar, but superior, form.

GECC chose to extend the tenor of its capital securities from 49 days to 32 years, in response to a shrinking auction rate preferred market in the US. It was also taking advantage of tighter credit spreads and lower rates in the UK market.

Scott Yeager, head of FIG at UBS, says: “This US issuer had the global presence and financial agility to recognise opportunity to refinance this form of strategic capital with investors in an entirely different market and in a different part of the world.”

At the other end of the phone line in London was Henrik Raber, head of the European syndicate at UBS, who handled the research, book building and selling operation for UBS in Europe. Managing the phone conference, which started at 10am London time, 5am Eastern Standard Time, was no mean feat.

Wave of calls

The calls from investors came through thick and fast. The bank had primed GECC with expected questions – having anticipated and prepared for questions from investors for months – and Ms Yoh was unflappable. Her main point was the sanctity of GECC’s rating, says Mr Raber.

“This is a company with a triple A rating, which is incredibly important. It has an unprecedented and well-earned following from institutions as diverse as central banks and small stockbrokers. They treat this paper like it is gold. GECC want to ensure their status among investors is maintained and furthered,” he says.

The phone conference was over within an hour, and Mr Raber and the UBS/Merrill syndicate and sales teams began an intense process of bookbuilding. But demand for the stock way exceeded expectations. UK pension fund and insurance investment managers, who eventually bought about three-quarters of the paper, were particularly impressed by the stock’s duration. The absence of gilts left a gap in their funding book for 2037 and the new stock covered it perfectly.

By September 7, when the price of 70 basis points above gilts (or mid-swaps plus 49bp), was announced, and the book closed, the initial goal for GECC of a £350m to £500m benchmark had been exceeded. The company says the deal was almost two-times over-subscribed and investors’ orders had to be averaged down.

The final deal size was £750m. The GECC name was well-known and trusted by investors in the UK and the sales targets had been achieved quickly, and without a roadshow detailing the deal. Mr Yeager says: “Although [GECC] is a US-based institution, it has operations across Europe and Asia. It may be viewed as a US name, but they are extremely diversified and their funding mirrors this diversification. They actively come to European markets, and deliver most of the different currencies that investors need.”

Now the bond is actively traded on the secondary market. Moreover, it has been accepted into the GECC capital structure without a murmur from investors, and the bankers expect other top-rated institutions to pick up on the long-dated subordinated structure early next year. Mr Raber says: “Subordinated long-dated stock is a very young market. More corporates will start doing them at the beginning of next year. Issuing subordinated debt, or even long-dated perpetual or Tier 1 securities makes sense.”

Other investors may not issue in quite such style, for GECC has greater demands and a more complex capital structure than almost any other institution on earth. The company has $236bn of debt outstanding.

Happy conclusion

This strong secondary market was the happy conclusion of a process begun in early August, when GECC announced that it would not be rolling over a $2.5bn portion of its balance sheet. It said it would exit the market in money market preferred stock. This stock has some tax advantages, but investors had lost interest and the market had shrunk, leaving GECC with an unwelcome disproportionate share. The decision to quit the market was the catalyst for a rethink about its capital.

In advance of the announcement to withdraw from this market, GECC had hired a group of investment banks to analyse options. The advisers examined the currency conditions and outlook for a syndicated stock, and advised the company that euro, sterling and dollars would be potential currencies. Dollar conditions deteriorated between August and September, so the dollar option was discarded.

Right credentials

Banks with strong sterling and euro credentials were given the mandate to run the offering. UBS says: “Our long track record of raising money in the sterling market appealed to GECC, a company with whom we have worked for decades. We are very strong in subordinated debt and capital securities, and have led the market for the past few years. ”

According to GECC, it picked Merrill because of the latter’s sales franchise with a global investor base. The sterling deal was paralleled by a euro deal for which the bookrunners were Deutsche Bank and Dresdner Kleinwort Wasserstein, which raised a smaller amount of debt but in the same format.

Aligned perspective

Each team of bankers from UBS and Merrill worked from their own central London offices in close co-ordination. They shared the same perspective on the deal, says Mr Raber. “We were fully aligned in terms of pricing, dynamics and our views. This is because the issuer would not partner two banks that they had canvassed previously but who had widely differing views. They knew that it wouldn’t work, that it wouldn’t make sense. When GE thought about who they should mandate, they naturally involved people with the best read of the markets.”

UBS has some justifiable pride about the outcome. As Mr Yeager says: “There has to be flawless execution. You cannot be seen to go out into the market and do anything other than perform seamlessly when you are entering a new asset class. This is regarded as a giant step into this market, by the world’s premier corporate borrower, so the execution has to be perfect.”

Moreover, banks and sub-underwriters would have expected to walk away with standard fees amounting to some $10m. Those three days – not to mention the run-up to them – were profitable and successful for all parties concerned.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter