BAT lights up bond market with strategic refinancing
Published: Sep 2024
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British American Tobacco
Photo of Simeon Stevens, Bank of America, and Daniel Wong and Carrine Wong, British American Tobacco.
Neil Wadey
Group Head of Treasury
Richard Williams
Head of Legal – Treasury
Laura Simionescu
Head of Financial Risk
Daniel Wong
Head of Corporate Treasury
Carrine Wong
Head of Corporate Funding
Kaven Bains
Corporate Finance Manager
British American Tobacco P.L.C. is a leading multi-category consumer goods company that provides tobacco and nicotine products to millions of consumers around the world. BAT’s purpose is to create A Better Tomorrow by Building a Smokeless World, offering adult consumers a greater choice of reduced risk products compared to cigarettes.
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The challenge
Prior to announcing the transaction, the group had circa £17bn equivalent of debt in total maturing over the next four years with circa £4bn maturing per annum from 2024 to 2027, primarily driven by the 2017 strategic acquisition of Reynolds American Inc. A high level of near-term debt maturities led to inflated liquidity needs to backstop maturities as well as high refinancing risk as maturities would need to be funded in all available windows regardless of market conditions.
The key challenges were:
Rising and volatile interest rate environment – BAT continue to see the impact of higher rates in the reported net finance costs.
Refinancing risks due to sector ESG concerns.
Sector capacity constrained due to crowded refinancing needs amongst competitors.
Balance between EPS, cash flow and targeting level of risk and delivery.
In addition, there was an intensive risk management activity related to the liability management exercise with the majority of the derivatives (total c. £2.7bn) to be unwound on the tender pricing date.
“BAT operates in a world with heightened risk and uncertainty; this transaction worked to reduce the impact of those risks,” explains Neil Wadey, Group Head of Treasury. “The inception of the project started 18 months prior in a review of the company’s leverage and refinancing risk exposure. Recognising a volatile economic environment and geopolitical conflicts erupting around the globe, there was a need to de-risk our refinancing events and given rapidly rising rates, the financial budget to execute the relevant strategy was narrow.”
The solution
The treasury team set out to improve resiliency and funding efficiency, and simultaneously de-risk BAT’s near-term debt towers, while extending its weighted average maturities beyond ten years.
At the end of July 2023, BAT launched a new USD benchmark five tranche transaction to take advantage of a constructive market tone, while announcing a concurrent tender offer that targeted ten series of GBP, EUR and USD notes maturing between 2024 and 2027. The dedication to preparation allowed for the decision to approach the market before the summer break.
The orderbook built on excellent momentum from the outset, peaking at circa US$26bn allowing BAT to set the spreads 25bps inside of initial price talks (IPTs) across all tranches. Even with the price revision, all books remained strong at launch, landing a final orderbook of US$23.4bn and printing US$5bn over 5’s/7’s/10’s/20’s/30’s with an average oversubscription of 4.7x per tranche.
The issuance attracted a strong depth and breadth of investor interest, whether measured by aggregate book size, ‘real money’ orders or geographic diversity. The addition of a 20-year tranche in the new issue minimised price breaks and provided best execution capabilities to achieve desired size objectives. On the tender, BAT opted to target bonds in one documented US eligible offer, pooling bonds into maturity buckets. The tender was well received attracting interest of circa US$7bn at expiration of the early tender deadline, allowing BAT to upsize the caps and select the optimal portfolio of US$4bn to repurchase in the most effective economic manner and achieve its corporate objectives.
(Bank of America, Deutsche Bank, Goldman Sachs & Co. LLC, Santander & Wells Fargo Securities were active bookrunners on the new issuance whilst BofA, Deutsche Bank & Goldman Sachs & Co. LLC were dealer managers on the tender offer.)
Best practice and innovation
BAT’s project is a culmination of work from reviewing the Group’s debt strategy and non deal specific investor roadshows to more recent work in engaging numerous internal partners for due diligence and structuring the actual transaction.
With the various objectives and success criteria, delivering a bespoke outcome required very thoughtful structuring and seamless coordination between all parties and the result achieved is a reflection of this. The timing of the exercise allowed BAT to issue at a good price and conclude the liability management exercise well within target. Investor participation across the orderbook highlights the reliability of the US dollar market and has injected new focus on different tenor options for the company.
Key benefits
Key benefits
Cost savings.
Risk mitigation.
Exceptional implementation (budget/time).
Improved key performance indicators (KPIs).
Given the volatility of the markets and expectation of interest rates to be higher for longer, the group no longer needs to fund large maturities regardless of market conditions and can choose opportunistic windows for future funding needs rather than being locked into a single period.
Mark Lewellen
Co-Head of Capital Markets EMEA, Deutsche Bank
It was a pleasure partnering with BAT on this important liability management exercise. The transaction enabled BAT to optimise its capital structure by extending debt maturities, while also meeting a range of important corporate finance objectives. BAT’s meticulous approach allowed the company to capitalise on strong capital market conditions, achieving exceptional depth and breadth of investor sponsorship on both the tender and refinancing elements of the transaction. Additionally, the financing showcased the team effort among the company, banks and law firms involved. Deutsche Bank is proud to have supported BAT.
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