Despite confusion in the markets, the immediate aftermath of the UK’s EU referendum proved to be the perfect time for British American Tobacco to return to sterling issuance.
British American Tobacco (BAT) is no stranger to the bond markets. And in the immediate aftermath of the UK’s shock decision to leave the EU, most in finance expected new sterling issuance to grind to a halt until at least late 2016
Markets were surprisingly resilient, however, and by Monday June 27, just four days after the referendum, BAT began to consider a sterling deal.
“We saw that markets appeared to be relatively stable and the yields we were seeing made the all-in financing rates look attractive for us versus our long-term metrics,” says BAT group treasurer Neil Wadey. “We also had a liquidity need and we were going into a closed period, which tends to concentrate the mind as it means that markets are inaccessible for four weeks or so.
“Others may have felt like sitting on the sidelines but we decided to move forward. Had we not been going into a closed period, we may have waited a week or so, but you have to play the hand you’re dealt.”
Simple solution
As a global business, BAT funds largely in dollars and euros. But the company is listed in London, reports in sterling and at this point in time needed liquidity in the UK currency.
“We could have gone to other markets and swapped but this was a relatively short transaction so we wanted to keep it simple,” says Mr Wadey. “Sterling was just what we needed, the rates looked appealing and we haven’t accessed the market for a while.”
On June 28, BAT contacted Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland to ask them how they felt about acting as lead managers for a short-dated sterling transaction. The request was greeted with surprise at first, but the more the four mainstream UK clearers considered the suggestion, the more it made sense. Markets were stable, BAT is a well-liked issuer and the timing seemed fortuitous.
“We don’t mandate the big four clearing banks for every sterling transaction, but in this case there had been a paucity of sterling deals and it was post-Brexit so we thought it was important to get the signals from investors right,” says Mr Wadey. “Having all four of them on the deal was the best way to make sure that we had all the market intelligence and information that we could possibly want.”
Over the next two days, the bookrunners studied the market forensically and on June 30, just a week after the EU referendum, the new issue was announced as a five-year sterling benchmark with initial price thoughts of 150 basis points over mid-gilts.
“The advice we were given was that investors would be receptive at that tenor and at that price, and that was the case,” says Mr Wadey.
Books opened just after 9am, a little later than usual to make sure that market sentiment had not soured overnight. It had not. Investors were enthusiastic from the start and by 11am, the book had grown to more than £2bn ($2.61bn), at which point guidance was revised to gilts plus 130 to 135 basis points (bps).
Just before the launch, BAT’s outstanding 2019 bonds were trading at 105bps over gilts, while the 2022 bonds were trading at a spread of 140bps. The new issue matures in 2021 so the guidance price was felt to be fair in an uncertain world.
Beating the odds
Investors clearly thought so. Normally, sterling deals are priced close to initial price thoughts and massive over-subscription is rare. In BAT’s case, the book grew to more than £2.25bn, allowing the company to set the price at 130bps over gilts and the size at £500m.
“We would have been happy with £300m to £350m but £500m was our maximum requirement and we were comfortably able to achieve that at a very good price so we were very pleased,” says Mr Wadey.
Some issuers might have been nervous launching a deal against a background of intense macro-economic uncertainty. But Mr Wadey was sanguine. “We had done our homework. We were getting very strong feedback from our lead managers that the market was stable and our deal would work. Also, our overall need was not huge so we felt pretty confident. As it turned out, the advice was spot-on and so was the execution,” he says.
At the time of issuance, few could have predicted the direction in which markets would go. However, in the weeks after BAT’s deal, the market continued to improve, hence the overall yield curve tightened, as did the spread on the BAT transaction.
“The result was a material tightening of the bond so perhaps we could have benefited from waiting, but in our particular situation, we didn’t really have that option,” says Mr Wadey. “In any case, the transaction met our long-term aspirations for a coupon so we were happy with the price and happy for investors to get some tightening.”
