Is your company thinking about a bond issuance? Here are some steps that can lead to a successful issuance.
The pendulum has swung in favour of the bond market as banks remain reluctant to lend long term and borrowing costs in the capital market stay at historic lows. For corporates ready to take the plunge and swap cosy banking relationships for refinancing risk and a global investor base, today’s climate couldn’t be better. It’s an arduous process, but the benefits are worth it.
A typical first step for a company expanding beyond bank finance for the first time is a US private placement. Available to both US and non-US companies, this market provides an alternative source of liquidity from the traditional bank market without the need for a credit rating or reporting requirements generally needed in the public bond markets.
Getting the maturity right is another consideration that will vary from organisation to organisation. Telecoms giant Vodafone’s key priority last August when it issued two back-to-back sterling bond issues totalling £1.8bn, was to reduce its refinancing risk by lengthening the maturity profile of its debt when rates were low. “We were able to lock in long-term interest rates of 35-40 years at 2.6% on a euro equivalent basis before tax deductibility,” says Neil Garrod, Director of Treasury at Vodafone. “Our post-tax borrowing cost is around 2% for 40-year money. The future economic environment is uncertain and the less frequently you go to the market to refinance, so you reduce refinancing risk.”
The maturity a corporate chooses will also depend on the purpose of the debt. If the bond has been issued to provide finance for a specific project, treasury may want to term the bond to match the point at which the project will begin to generate cash for the company. Companies will also want to avoid different bond issues maturing at the same time.
A key decision before deciding to issue in the bond market is whether to obtain a rating or not. A rating is generally required for public bond issuance and helps open the door to a wider investor universe. Acquiring a rating takes between six to eight weeks and involves SWOT analysis of the company by the ratings agency. The credit rating is also a vital piece of the jigsaw because it sets a company’s re-financing risk. Treasury teams have to weigh the increasing cost of capital as the amount of debt grows and investor appetite slows, with the fact that debt is tax deductible. At the centre of this balancing act lies the credit rating.
Corporates can issue debt in any currency; therefore deciding which is another consideration. Organisations often choose the currency and location of their issue according to their revenues streams and where they do business. For many, price is the driving factor. Treasury makes the decision according to which currency is cheapest by comparing all borrowing costs when bought back into euros. Corporates also issue in the currency where demand is strongest, and in many instances this is in the US.
Timing the issue is the next priority. Vodafone has an eye on the market long before its bonds are due to mature. “We are an opportunistic borrower, not a calendar borrower,” says Garrod. For corporates with a lower rating, timing the market around strong demand is more important than for those with higher ratings. And teams have to anticipate any sudden macro-economic news that could affect book building.
At the end of the process can treasury sit back and relax? For Garrod, his eye is already on the secondary market, where investors who bought the primary issue go on to sell to other investors, and the next bond issue. “You want bonds to trade well in the secondary market because it encourages investors to participate in the next issue,” he concludes. “On the other hand, if they trade too well it means you’ve left a lot of money on the table!”