best debt deals, The

Global Finance, Feb 1999 by McTigue, E Guthrie

Call 1998 the "Trillion-Dollar Year" Despite the seizing up of bond and syndicated debt markets following August's Russia crisis, Securities Data reports that no less that $ 1.08 trillion in corporate paper was floated in the world's public capital markets last year-a startling 29.2% more than 1997's record issuance of $838.1 billion. And that's not counting another $376.5 billion of corporate debt placed privately. Nor was there any falloff in the number of issues. Altogether there were 12,151 deals last year, or 815 more than in 1997.

US markets, of course, absorbed by far the largest chunks: $654.2 billion, or 60.7%, of the public deals, and all but $49.8 billion of the private placements.Total money raised outside the United States with public bond offerings also hit a record level: $398.1 billion.

The year's two main themes were, simply, hugeness and inventiveness. Roughly 80 deals, or more than twice as many as in 1997, raised $1 billion or more-and topping them all was WorldCom's gargantuan $6.1 billion offering. As for unusual deal structures, check out the Swiss Life, Parmalat, and National Provident issues below.

1 WorldCom's megabond

After WorldCom won the bidding for MCI, it had to pay $7 billion to to buy out British Telecom's 20% MCI stake, a transaction financed chiefly with short-term bank loans. To refinance the loans with longer money, WorldCom CFO Scott D. Sullivan arranged a big bond offering through Salomon Smith Barney. The US corporate bond market looked lousy, but Scott hoped to raise $3-4 billion.

WorldCom had recently won a credit upgrade, however, to triple-&plus, and another upgrade, to single A, was expected. That helped stir investors. So the final deal-coming early in August just days before Russia's default-was a blockbuster $6.1 billion. That easily eclipsed Norfolk Southern's record $4.3 billion sale in May 1997. (A $6.1 billion junk bond deal by RJR Holdings in 1989 was sold at such discounts that it raised only $4 billion.)

The issue was in four tranches with maturities of three, five, seven, and 30 years. Largest was the 30year tranche, which accounted for $1.75 billion. Prices ranged from 70 basis points over comparable US treasuries on the three-year bonds to 135 basis points over treasuries on the 30-year securities.

2 Fannie Mae's Benchmark program

Encouraged by the success of jumbo corporate issues in 1997, Linda Knight, senior vice president and treasurer of the privatized Washington mortgage agency Fannie Mae, decided to fill the gap in liquid market instruments left by the US Treasury's decline in borrowing with regular offerings of jumbo issues. After talking with banks, central banks, dealers, and pension funds about their liquidity needs for active trading, hedging, dealers' short positions, and repos, Knight and her treasury team decided to float bullet issues at maturities of two, three, five, and 10 years on a regular monthly basis.

The first issue, lead-managed by Credit Suisse First Boston, Goldman Sachs, and Merrill Lynch in January 1998, started out as a $3 billion issue but quickly expanded to $4 billion. A five-year, triple-A issue, it was priced at only 19 basis points over five-year US treasuries and found takers in Asia (12% of the issue) and Europe (24%) as well as the United States (64%). Under what it has dubbed its Benchmark program, Fannie Mae has since raised nearly $40 billion more with similar issues, all at monthly and quarterly sales. Fannie Mae's program is now being copied by Freddie Mac, the Federal Home Loan Bank, and Germany's big mortgage institution, DePfa-Bank.

3 Swiss Life's exchangeable bonds

Convertible bonds are swapped for the issuer's shares and thus are eventually equity. Exchangeable bonds, however, are swapped for other companies' shares and remain debt for the issuer. Last year exchangeable issues were catching on big in Europe as a way to unwind cross-shareholdings without dumping shares and roiling markets. But the most interesting (and complex) was a multi-tranche issue for six different European blue chips issued last spring by Schweizerische Lebensversicherungs & Rentenanstalt, or Swiss Life Insurance & Pensions.

Dominique P Morax, the insurer's new co-president and finance director (he joined Swiss Life a year ago from Zurich Group), wanted to leverage the debt-free balance sheet and raise a war chest for acquisitions. Working with Warburg Dillon Read, he devised a clever way to exploit Swiss Life's huge stock holdings.The result was a $2.1 billion issue in three currencies-Swiss francs, US dollars, and euros-exchangeable into shares of Glaxo Wellcome, Mannesmann, Novartis, Unilever, Royal Dutch/Shell, and UBS.

The maturities were all five or seven years, the most liquid in Europe's markets, and Morax wangled an exceedingly low coupon rate, only 1.58%-easily covered by the underlying shares' 1.71% in dividends.

4 Parmalat's perpetual preference shares

America's genius at obscuring the differences between equity and debt is spreading to Europe. Most intriguing was an issue-actually several issues in different currencies-of a weird preference stock that behaves like a bond, which Merrill Lynch cooked up for Italian food group Parmalat.