best debt deals, The

Global Finance, Feb 1998 by Shepherd, Bill

Stock offerings tend to get the press coverage, but it is the debt deals-bond offerings, syndicated bank loans, commercial paper, medium-term notes-that are the backbone of corporate finance. Together they hit spectacular levels in 1997.

Most noteworthy were "jumbo" bond deals in the United States-especially to finance huge acquisitions. US West, a regional telephone system, started off in January 1997 with what was supposed to be a $2 billion offering to refinance some of the commercial paper issued in its $5.3 billion acquisition of Continental Cablevision the previous year. But the deal quickly ballooned to $4.1 billion when lead manager Merrill Lynch discovered that demand was strong. That deal was then topped in May by a record $4.3 billion bond sale by Norfolk Southernwhich earned our ranking as number one Debt Deal of 1997.

The most interesting debt financings elsewhere in the world emanated primarily from Europe. German companies in particular arranged debt offerings that were markedly innovative-including Siemens's parallel bond and Geberit International's junk bond deals. And imaginative asset-backed financings continued to break new ground in 1997. Among the many possibilities we chose Pacific Gas & Electric's $2.9 billion "stranded assets" deal.

1 NORFOLK SOUTHERN'S $4.3 BILLION BOND DEAL

Norfolk Southern's financing for its hostile acquisition of the big northeast US freight monopoly Conrail easily ranks as the most interesting and elaborate debt financing of the year. After fighting against CSX for five months to gain control, Norfolk Southern's aggressive boss, David R. Goode, finally agreed in April to set up a joint venture with CSX to do the $10.2 billion takeover together. Norfolk Southern wound up with 58% of Conrail's routes for $5.9 billion. CSX got 42% for $4.3 billion.

As ammunition in the battle, J.P. Morgan and Merrill Lynch arranged a $13 billion credit facility for Norfolk Southern in February, a gambit that gave the railroad great credibility and forced both Conrail and CSX to take its bid seriously. Once the joint venture was arranged, Merrill and Morgan sold $4.3 billion in bonds-making it the largest debt fund-raising in history.

The deal edged out US West's $4.1 billion bond offering in January and easily eclipsed the $3.5 billion raised a year earlier by Lockheed Martin, the deal that started the current jumbo trend. In its 1989 leveraged buyout financing, RJR Holdings sold junk bonds with a face value of $6.1 billion, but the securities were so heavily discounted that they raised only $4.1 billion.

Like the US West financing, the Norfolk Southern issue benefited hugely from the new trend to tailor individual tranches for specific institutional investors. The Norfolk Southern deal eventually expanded to include eight tranches (compared with six for US West), with maturities ranging from three to 100 years and including a 40-year tranche with a seven-year put. Coming less than two weeks after CSX sold $2.5 billion in bonds to finance its side of the acquisition, the Norfolk Southern issue was heavily oversubscribed and was rated BBB+. Norfolk Southern's weighted average cost of capital: 7.43%.

2 ICI's $10.6 BILLION SYNDICATED LOAN

The $10.6 billion that Britain's Imperial Chemical Industries raised last May to pay for its purchase of Unilever's specialty chemicals business is the largest syndicated loan so far in Europe-and is helping to create a European secondary market in syndicated loans like the one already under way in the United States.

A five-year loan arranged by Goldman Sachs International, SBC Warburg, and HSBC Group, it was an expensive deal-55 basis points over LIBOR, or roughly three times the spread that ICI paid for a $2.1 billion syndicated loan four months earlier. A big difference was that acquisition financing is considered riskier, and ICI finance director Alan Spall wanted $4 billion of the loan in the form of a revolving credit. Moreover, the huge loan pushed ICI's debt-equity ratio up to a dizzying 10 to 1. But ICI is selling off some 3 billion in assets, and its cost will decline to 40 basis points over LIBOR as it increases its interest cover.

The most interesting feature, however, was the fact that ICI, to keep the cost from going even higher, agreed to "unrestricted transferability"-which allows the loan's buyers to sell off pieces without getting approval from the borrower. That concession, which is rare in eurolending, opened the door to secondary trading.

3 SIEMENS'S PARALLEL BONDS

In the run-up to European monetary union, Siemens, the German engineering and electronics giant, scored a notable coup in February 1997 when it issued the first corporate parallel bonds-a type of issue now becoming common. Managed by J.P. Morgan, the deal raised $1.16 billion with 10-year securities issued in three financial centers (Frankfurt, Amsterdam, and Paris) and in three separate currencies: Deutschemarks, Dutch guilders, and French francs. Assuming monetary union goes ahead next January, the three tranches will suddenly convert into one jumbo issue denominated in euros.