Three of the best: A highly accommodative market for European corporate bonds eliminated any excuse issuers might have had for not pushing the boundaries. For demonstrating in three currencies that hybrid debt can be a valuable feather in corporate caps and a useful asset in investors’ portfolios, BG Group’s three-part hybrid bond is IFR’s Investment-Grade Corporate Bond of the Year.
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In a move to strengthen its capital structure, cement its credit rating and diversify its funding sources in the light of significant capex projects in Brazil and Australia, BG Group in mid-June priced a €500m, £600m and US$500m hybrid corporate bond.
BG’s capital expenditure is expected to amount to US$11.5bn and US$12.5bn respectively in 2012 and 2013.
The company and its structuring advisers, BNP Paribas and RBS, as well as leads, Barclays and Deutsche Bank, on June 18 started marketing a dual-tranche sterling and euro offering, following a four-day roadshow across Europe and Asia, and across three different time zones.
Later in the day, both parts – maturing in 2072 – priced to offer a 6.5% coupon on the back of almost twice subscribed order books.
Both trades tightened comfortably on the break, but rather than resting on its laurels, less than 48 hours later the company opened books on a Reg S US dollar tranche with the same maturity.
That issue garnered an order book of US$4.5bn, allowing leads to fix the coupon in line with the other two tranches at just 6.5%, well inside of initial guidance in the 6.75%–7% area.
BG Group’s head of funding and investments at the time, Charles Stewart, called the deal a “goldilocks transaction” and the three major ratings agencies also presented the offering with their seals of approval. Moody’s, for instance, noted that the company’s liquidity profile would benefit from the new notes.
Observers highlighted that the spread had been favourable on these transactions relative to a range of senior bonds priced around that time.
Fiat, for example, priced a €600m four-year deal just weeks later with a coupon of 7.78%. In the week prior to the BG deal, Telecom Italia, rated just one notch lower than BG by Moody’s and in line with BG from S&P and Fitch, priced a €750m December 2018 bond with a coupon of 6.125% – just 0.375% tighter than BG.
Leads said that they had achieved their key objectives of securing 50% equity credit from each of the three major ratings agencies by balancing the requirements of each agency’s hybrid criteria.
Investors likened the deal – then the first hybrid in the corporate space in almost three months – to previous similarly structured transactions, especially from German utility RWE.
They maintained, however, that BG Group’s currency scope and timing had given it the edge over comparable deals priced in the awards period.
Several market players correctly predicted when the deal arrived that BG’s ambitious hybrid operation would inspire other issuers to mimic the energy group.
In September, SSE priced a €750m and a US$700m perpetual non-call five-year bond at 5.625%, also citing capex and ratings protection as the rationales. In the same month, crossover credit ArcelorMittal issued a US$650m 2072 non-call 5.5-year bond at 8.75%.
BG’s notes also stand out from comparables, thanks to their secondary performance.
All three tranches were trading at a cash price of between 107.5 and 110.25 at the time of writing, outperforming RWE’s, ArcelorMittal’s and SSE’s hybrid notes. Those were all trading of cash prices of between 102.25 and 108.
Several syndicate officials concluded that BG’s transactions had helped hybrids become an integral piece of the capital markets furniture.
“Now that investors understand the structure of these issues, it enables them to spend less time evaluating the terms and more time focusing on the rationale for the issue and the issuer’s underlying credit,” said Richard Tynan, head of CEEMEA syndicate at RBS.
