The challenge
As part of its strategy to grow revenues from global markets, STE completed three strategic overseas acquisitions (namely MRA Systems, Newtec and Glowlink) totalling SG$1.1bn (c US$800m). To fund the acquisitions, which were the largest in STE’s history, the treasury team faced numerous key challenges:
- Securing diversified financing sources at the most competitive pricing under a tight schedule.
- Mitigating the risk that acquisitions might not be completed until anti-trust approvals had been obtained, amidst high geo-political tensions in 2019.
- Matching the financing tenor with the projected future free cash flows to optimise capital employed and minimise negative carry from excess cash in the future.
- Matching the funding currency to the underlying economic currency of the investments to avoid foreign currency volatility in the future.
- Engaging the rating agencies to anticipate any negative impact on the Group’s AAA credit rating from these acquisitions.
- Recycling capital to fund any future investments.
The solution
The team devised a financing roadmap from bridge financing to term-out financing. Given STE’s strong AAA credit rating and the market conditions, the most competitive funding sources were the debt capital markets. To mitigate the inherent risk that acquisitions may not be completed due to anti-trust reasons, STE decided to undertake short-term bridge financing first, followed by term-out financing. The company assessed the underlying economic currency of the investments was US dollar and hence US dollar debt should be used to form a natural hedge against the US dollar inflows.
In August 2019, STE set up a US$1.5bn US Commercial Paper (USCP) Programme1 and issued a total of US$1.1bn for acquisition bridge financing and working capital requirements in the US. The programme was assigned P-1/A-1+ by Moody’s and S&P respectively.
In March 2020, STE further established a SG$5bn euro medium term note (EMTN) Programme2 to leverage its AAA rating to tap the debt capital market for longer-tenor financing to optimise its short to medium-term funding mix and capital structure.
However, the period from mid-March to mid-April was challenging for corporates to obtain funding; market liquidity had dried up and credit spreads spiked when the devastating impact of COVID-19 became apparent. STE monitored the markets closely and seized the optimal pricing opportunity in late April 2020 to successfully issue US$750m five-years medium term notes at 1.5% coupon. The bond proceeds were used to redeem the maturing USCP.
Best practice and innovation
STE also actively explored alternatives to recycle its economic capital and improve return on equity. In February 2020, Total Engine Asset Management (TEAM), an engine leasing JV between STE and Marubeni Corporation, successfully entered into agreements for the sale of 30 aircraft engines using a securitisation structure3. The structure included US$257m of fixed rate notes offered in three tranches, and the placement of equity notes. It was the first aircraft engine-backed securitisation originated by a lessor headquartered in Asia. The transaction was well-received by the market and this resulted in an oversubscription across all debt tranches. The transaction also successfully established institutional investor relationship, which laid the foundation for future asset-backed securitisations (ABS).
- The first non-bank company in Singapore to set up a USCP programme.
- The lowest bond coupon/yield achieved for a five-year USD issuance by a Singapore corporate.
- First aircraft engine-backed securitisation originated by a lessor headquartered in Asia Pacific.
Key benefits
- Funding sources diversified.
- More competitive pricing.
- Significant interest savings.
- Shareholder value increased.
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Footnotes
