When Bayer held a beauty parade last year to choose banks for the financing of its Eu7.25bn acquisition of Aventis CropScience, the winners turned out to be three of the banks that have been championing their balance sheet capacity. But rather than showing that big is beautiful, Bayer's selection process highlighted how borrowers are becoming more sophisticated in getting the most out of bank relationships.
If you hail from Leverkusen (population circa 150,000), the past 12 months have been pretty satisfactory. Granted, Zinedine Zidane broke the hearts of the town's top football club and its fans with a firecracker of a goal in the UEFA Champions' League final, but not before Bayer Leverkusen had disposed of Arsenal, Liverpool and Manchester United along the way.
But it was not just British-based footballers that have come away from Leverkusen crestfallen and empty-handed in the past year. One of the most intriguing aspects of a Eu5bn two tranche bond split into five and 10 year tranches from Leverkusen-based chemicals firm Bayer at the end of March was that "pure"' investment banks were the chosen trio of lead managers.
The Bayer transaction was the largest ever euro denominated deal launched by a borrower outside the telecoms and autos sectors, and might therefore have appeared to be tailor-made for the investment banks, with all their credit research, pricing expertise and placing power.
But in the event, the bond, which attracted an order book of some Eu11bn, was led by Bank of America, Deutsche Bank and JP Morgan. That was certainly an important feather in the cap for Bank of America, whose head of global markets, Arrington Mixon, describes Bayer as a "wonderful client to bring to the market".
Like the other lead banks, Bank of America owed its inclusion within the lead management trio to the size of its balance sheet and its support of the broader financing for Bayer's Eu7.25bn acquisition of Aventis CropScience. The signing for the acquisition took place at the beginning of October 2001, but according to Johannes Dietsch, Bayer's head of corporate finance, the process of putting together the financing for the deal had already begun in the summer.
"We set out with no preconceptions about the banks that would be involved," says Dietsch. "Instead we sat and listened to the acquisition finance presentations of more than 30 banks that came to Leverkusen last July and August."
From those presentations Bayer developed a financing strategy based on its cost requirements and risk tolerance. As a result, 11 banks were asked for quotes, with Bayer unequivocal about what it expected from banks likely to carry away the ultimate mandate. "We made it very clear that any banks that wanted to participate in the very interesting fee income business of a bond would have to provide two things," says Dietsch. "Number one, they had to be prepared to provide a bridge facility; and number two, to provide a substantial commitment in terms of CP backstop facilities."
A firm commitment to the Eu6bn bridge facility, then, was a critical prerequisite for a lead management spot in the Bayer bond, but balance sheet muscle on its own would not have been enough. Dietsch explains that Bayer put together a variation grid assessing the 11 banks that were bidding for the mandate according to four separate criteria.
The first was pricing of the whole package; the second was banks' placing power in the euro denominated as well as the global bond markets; the third was related to documentation proposals on credit facilities, such as triggers and covenants; and the fourth was described as "others" - taking into account historical relationships and performance, M&A advisory capability and other so-called "soft" factors. Ratings advisory services, says Dietsch, were not a consideration, as Bayer was to take care of this in-house.
The first two criteria were more heavily weighted than the third and fourth, and although Dietsch is not prepared to reveal the final order in which the three winning banks were ranked, he does concede that had Bayer only been launching a bond and required no credit facilities, "the trio of mandated banks might have looked different". That gives some indication of how powerful the lure of the banks' balance sheet can be for borrowers eager to tap the loan and bond markets in tandem.
Ultimately, says Dietsch, investor response to the Bayer bond - which offered some welcome industrial diversification for European credit investors - was such that the borrower's need for short term funding facilities was clearly lower than had originally been envisioned, with drawings under the bridge facility unnecessary as the bond was placed before the closing of the acquisition. "Last autumn we took precautions to ensure that we enlarged the size of our EuroMTN programme from Eu2bn to Eu8bn and of our CP programme from $5bn to $8bn, because we recognised that we might need to finance the entire Aventis acquisition with short term or bridge facilities," he explains.
Bayer's original plan was to split the acquisition financing 50:50 between long term bonds and shorter dated CP. The reasoning, says Dietsch, was that the company had good cashflow generation from the acquisition and a strong deleveraging plan."In the event," he says "we were surprised that the bookbuilding process of our bond issue went so well, which allowed us to increase the issue from Eu3.5bn to Eu5bn, meaning that the CP component of the acquisition funding will be much lower than we had anticipated."
Looking to the future, Dietsch says that Bayer is planning to offer ratings stability to its bondholders. "Our specialists here have calculated that from a purely weighted average cost of capital perspective a triple-B rating would be the optimum, but that is not a rating we would like to go down to as it would limit our flexibility," he says. "We have no intention of increasing our gearing to that extent and we also want to maintain a short term rating of A1/P1, which will allow us to access the CP market. So we would definitely aim to keep a long term rating in the strong single-A range." *