As bank debt becomes harder to source and borrowers turn to new bond market structures, independent advisory banks such as Rothschild are seeing their role increase – or perhaps return to historical levels – as was shown in its role refinancing the debt for a UK port owner.

Now that the universal frenzy for loan assets has faded into history, there is once again a role for the independent financial adviser in assembling large lending groups. Rothschild recently proved this when Peel Ports refinanced its debt to the tune of £1.6bn ($2.54bn), via a whole business securitisation.

Peel Ports is part of the wider Peel Group, which has been built up by UK property billionaire John Whittaker over the past 40 years. As the UK’s second largest port owner, its operations include Glasgow’s Clydeport, Medway Ports, container terminals in Belfast and Dublin, and, the jewel in the crown, the combined Port of Liverpool and the Manchester Ship Canal.

Advised by Rothschild, Peel acquired Mersey Docks and Harbour Company (which owns the Port of Liverpool) in 2005 and sold off 49.9% of Peel Ports the following year. The buyer was the pan-European infrastructure fund of RREEF, part of Deutsche Bank Asset Management. At the same time it concluded a £1.1bn refinancing, funded fully by bank debt. This was committed by three lead banks and then syndicated to another 25.

Thinking ahead

“At that time, loan syndication was roaring, and banks were eager for more loan assets,” says Swagata Ganguly, head of structured finance at Rothschild, which acted as independent financial adviser to Peel Ports for the refinancing. As part of the new capital structure, the company also entered into a series of 30-year inflation and interest rate swaps. Even then, the ultimate ambition was to replace the bank debt over time with bond issuance.

The debt had a seven-year maturity, which was due for repayment in December 2013. Since the company wished to refinance well in advance, it began thinking about its next move with a couple of years to spare. It also needs to fund the £350m development of Liverpool 2, a new port facility able to accommodate the largest container ships.

Peel Ports has made good progress since 2006. Its earnings before interest, tax, depreciation and amortisation grew from £100m to £150m in 2012. “In the deepest recession ever in the UK, the ports business has proven remarkably resilient,” says Mr Ganguly. The UK has the largest ports industry in Europe. Because it is an island, its ports handle some 95% of its imports and exports by volume, so even though bank lenders are pulling back, the sector remains relatively attractive to them.

Experienced operator

Rothschild has travelled this road before with a port operating client, though with slightly different results. Similar to Peel Ports, Associated British Ports (ABP), the UK market leader, has also chosen to diversify its funding sources, using Rothschild as its debt and swaps procurement adviser.

ABP concluded a £2.36bn refinancing package at the end of 2011. This was to refinance the debt incurred when it was taken private in 2006 and which was due to mature in December 2012. At the time, it announced that it had established a “new funding platform to access both bank and bond markets”. Peel Ports set out to achieve much the same goal, though its pattern of execution took another course.

ABP raised £500m in the capital markets with a debut bond (BBB+/Baa2) carrying a 6.25% coupon and a 15-year maturity. It also raised bank debt with maturities of three, five and seven years from a group of 11 banks (tellingly, with no core European banks among them). A few months later, in April 2012, it placed £200m in floating rate senior secured notes with US insurance giant MetLife. The notes have an average life of 20 years.

Peel Ports has similar ambitions, though it is working in reverse order. “Early on, the company looked at the bond markets and at private placement, and decided that it would get best execution from the private placement markets,” says Mr Ganguly, adding that there were two very good reasons for focusing on the US private placement market. “It had a record year in 2012, so market conditions were excellent and therefore could deliver better pricing than the public markets. And the company felt that the private placement process would provide investors with more time to understand, assess and fully appreciate the Liverpool 2 project.” The financing structure allows public bonds, he says, so Peel Ports would certainly look to access the public markets as and when the market conditions are appropriate.

It was a matter of sequencing – do the private placement, giving the credit some limited exposure and then, with the project construction risk out of the way, go to the public bond markets. The results are ultimately the same, leading to more diversified, longer-term funding.

New market

The US market had invested in UK corporates before, principally utilities, but had not seen a UK non-utility whole business securitisation. “They had done ports, and they had done securitisations, but they had never done a port securitisation,” says Mr Ganguly.

While Peel Ports is a rare example of the breed, it is not the first. Back in 2001, PD Ports, owner of the UK ports of Tees and Hartlepool (Teesport), raised £305m via a whole business securitisation. Peel Ports issued its mandates in December 2011, just as ABP was completing its transaction. It wanted to refinance at least a year ahead of maturity. As long as its back was not against the wall, it could maintain some competitive tension among potential lenders. RBS had a key function as joint financial adviser as well as lender. While Rothschild claims responsibility for assembling the bank group and the swaps, the RBS role included that of sole ratings adviser and private placement agent.

The deal structure was finalised in March 2012, and was awarded two private investment grade ratings in April. Work had also started on securing cost-effective funding from the European Investment Bank (EIB), predicated on the fact that Liverpool 2 would promote “transport sustainability”. Apart from being cheap, EIB funding gives a credit a useful seal of approval.

Complex deal

After some discussion over the merits or otherwise of going out in the summer vacation period, the transaction went to the bank market in mid-July. “There was a very wide group of banks that expressed an interest,” says Mr Ganguly. “The company also had to source swap capacity at optimum price, so the choice of club members depended on the price not just of the loan but also of the swaps.”

The transaction was completed in December 2012. It involved the simultaneous raising of £1.06bn of bank debt from 11 club banks, a £150m loan from the EIB and £350m equivalent of private placement notes, with US dollar and UK sterling tranches ranging from seven to 25 years' maturity. To reduce refinancing risk, the maturity of the bank debt is staggered across three, five and seven years. The deal includes an embedded project finance facility for the new Liverpool container terminal. As law firm Linklaters noted, the transaction involved seven different legal jurisdictions and 12 law firms, with a complex two-day escrow process to coordinate the closing of all the debt sources and discharge of the existing debt.

“Over time, the funding structure will evolve more to the capital markets,” says Mr Ganguly. “The three-year debt can be taken out by bonds and the five-year by the US private placement market.”

While the existing swaps were subject to a mandatory break matching the maturity of the term debt, the company wished to keep them in place. “The banks were asked to take on a share of the swaps,” says Finula Cilliers, Rothschild’s head of derivatives advisory. “They have breaks at six, eight, 11 and 13 years, to achieve a balance between capacity and pricing. And while inflation swaps are typically all senior to bank debt and private placements in securitisation structures, these are a mixture of super senior and pari passu.” The banks agreed to hold their swap prices for the somewhat longer period needed for private placement due diligence.

There is a sense of back to the future here, as Rothschild does what it used to do 30 years ago – helping to assemble sizable clubs of lenders. “A feature of Peel and ABP is the use by corporates of independent advisers to assemble large bank groups,” says Mr Ganguly. “In a world where a single bank can often only lend up to 10% to 15% of the company’s overall financing needs, the process of arranging the club and delivering optimal terms falls upon the company and its independent adviser.”

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