The challenge
Following the transformational acquisition of Shire plc by Takeda in January 2019, the new, enlarged business doubled in size in terms of both revenue (now c.US$30bn) and complexity as the number of geographic regions increased. Additionally, the level of gross borrowings grew after the US$62bn acquisition to in excess of JPY5,000bn (c.US$45bn), primarily as a result of the need to fund a c.US$30bn cash consideration associated with the Shire plc acquisition.
When the financing plan to raise this was being designed, several considerations had to be simultaneously assessed, such as:
- The need to minimise overall financing costs.
- Matching the currency denomination of debt to Takeda’s cash flow in that currency.
- Rightsizing the starting leverage level for the new, enlarged Takeda group.
- Debt maturity profile had to be matched with total expected company cashflows over time.
- The determination of any potential limitation in investor appetite for Takeda’s debt across various markets (US, Europe, Japan).
The solution
Takeda’s global treasury team concluded that it made sense to raise JPY500bn (c.US$4.5bn) in JPY hybrid bonds in addition to issuing regular straight bonds in USD and EUR to fund the c.US$30bn cash consideration for Shire plc. The hybrid bond debt tranche was deemed to provide the right balance of cost and benefit, as its slightly higher coupons would come with a 50% equity credit from rating agencies, thus favourably impacting leverage calculations.
However, there were challenges in raising the JPY500bn (c.US$4.5bn) hybrid bond as follows:
- The proposed size of the hybrid bond was unprecedented. It would be the largest ever Japanese Corporate Bond issuance (not just largest ever hybrid bond issuance), in addition to being the second largest ever bond issuance per tranche globally in any currency.
- To reach this size at an acceptable cost, the company needed to optimise all aspects of the issuance process and design bond features that exactly suited the needs of the hybrid bond investors in Japan, whilst also making sure the needs of the rating agencies were satisfied to ensure that the bonds qualified for a 50% equity credit in leverage calculations.
- As a fall-back contingency, were Takeda not to achieve the full subscription of this financing, the company needed to have a backstop facility in place that would all but guarantee its financing needs.
The lead underwriters on the hybrid bond were Mizuho, MUFG and SMBC.
Best practice and innovation
There were several aspects to the success of Takeda’s hybrid bond offering. First, the careful selection of the non-call period (five years and four months) for the bond. Second, the precise launch time setting based on strong investor momentum. Third, the company designed the issuance to attract a solid credit rating.
“We undertook a massive debt investor roadshow campaign; our global treasury team met and then followed up with 42 of the largest life insurance companies, property insurance companies, city and trust banks, asset managers, central public funds, regional banks, local banks (Shinkins) and others across Japan,” explains Amit Singh, SVP Group Treasurer.
The company also deployed a strategic execution method and developed a robust contingency plan in the event that it didn’t achieve the full amount of the bond.
Key benefits
- Successful issuance of the full amount of the hybrid bond at a yield of 1.7% for a 60-year NC5+ debt.
“We believe that the most unique aspect of this transaction was its industry transformative impact on Japanese capital markets,” concludes Singh.
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