A debt bond issue made sense for UK budget airline easyJet to diversify funding away from aircraft leasing, but markets were experiencing turbulence in early 2016. Joanne Hart looks at how the company fared in the debt capital markets.
As a pioneer of low-cost flights in Europe, easyJet is one of the best-known brands in the travel industry. In recent years, it has also become a stock market success story, with a market capitalisation of more than £6bn (€7.75bn). Yet the business is only 20 years old and spent most of the past two decades relying on mortgage aircraft finance transactions to fund its expansion.
“This has served easyJet well in the past but it was clear that the company was on a journey; it was growing up and maturing and the time was right to diversify sources of funding,” says group treasurer, Mike Hirst.
Mr Hirst joined easyJet in 2014 and embarked on a comprehensive analysis of the group’s funding. “It became apparent that there was an opportunity to access the debt capital markets to reduce the reliance on mortgage aircraft and access unsecured funding,” he says.
Chasing ratings
As a first step, the company appointed a group of 12 relationship banks and issued a revolving credit facility. In order to attract institutional investor interest and achieve optimum pricing, however, easyJet needed a decent credit rating so, in early 2015, Mr Hirst approached the rating agencies on a confidential basis. By the summer, easyJet had been given a Baa1/BBB+ rating from Moody’s and Standard & Poor’s and, once the rating was given, it was natural to think about tapping the bond market.
The credit rating outcomes were very positive for us, demonstrating the strength of the easyJet credit story – they are also sustainable. Accessing the bond markets was a strategic move to diversify our funding sources – we intend to be a repeat issuer going forward provided current market conditions prevail,” says Mr Hirst.
The next few months involved meticulous planning, a key part of which was choosing the bookrunners for the deal. “We ran a really robust process. I interviewed the syndicate desks of all our relationship banks capable of supporting a debt capital markets transaction. I wanted to look into the whites of their eyes and see if they believed in our credit story and if they could convincingly sell it. Also, we hadn’t decided if we were going to issue in euro or sterling so we needed a syndicate group that would allow us to go either way,” says Mr Hirst. “Essentially, we wanted a team that could optimise price,” he adds.
That team comprised Bank of America Merrill Lynch, Barclays and Société Générale. Once assembled, they set about compiling the documentation for a euro medium-term note (EMTN) programme and considering when to launch the easyJet bond. The process took several months, taking until the fourth quarter of 2015.
“We decided that the end of calendar year 2015 was not the right time to talk to the debt markets so we launched our EMTN programme and announced our credit ratings on January 7. We wanted to get the attention of potential debt investors and generate momentum so the beginning of the year seemed like a good moment to announce a transaction,” says Mr Hirst. The following week, easyJet embarked on a gruelling roadshow, visiting London, Edinburgh, Amsterdam, Paris, Munich and Frankfurt to see almost 90 investors.
“The reception that we got from investors was great. Markets were choppy at the time so new issuance was minimal and that allowed investors to take time getting to know us and do their credit analysis,” says Mr Hirst.
Right timing
A key question that concerned investors was the number of unencumbered aircraft owned by easyJet – as of the end of September 2015 the figure stood at 114 out of a total of 241. “Our strategy is to bring new aircraft onto the balance sheet unencumbered and this gave comfort to unsecured investors. They were also interested in our hedging policies and in the key differentiators between us and our competitors,” says Mr Hirst.
Having given satisfactory answers to investor questions, the group would normally have expected to move quite fast. But markets were not normal at the start of the year. “The liquidity was in the market to get a transaction done in January, but not at an acceptable price so it became an exercise in patience. We had daily calls with the syndicate but we wanted to wait until conditions were right,” says Mr Hirst.
On Monday, February 1, an afternoon call with the syndicate looked promising, overnight markets were reasonably calm and easyJet hit the screens on Tuesday, February 2 with a €500m no-grow deal maturing in 2023.
“Our initial pricing guidance was 165 to 170 basis points [bps] over mid-swaps and within an hour we were more than 10 times oversubscribed. We then tightened to 150bps plus or minus 3bps and only lost €750m of orders, so we still ended up nine times oversubscribed and we brought the final spread in to 147bps,” says Mr Hirst.
“It was nail-biting and frustrating to wait those couple of weeks after so many months of planning, but our patience paid off. We didn’t expect to have to re-open debt capital markets in Europe at the same time as executing an inaugural bond transaction. The banks were heavily challenged along the way but their advice and judgement were sound and they delivered exactly what they said they would.”
