Carmelo de las Morenas, CFO
What was your borrowing strategy this year and how successful has it been?
We have achieved our objective this year, which was to complete last year's refinancing of the acquisition of YPF. The acquisition was initially funded by pure acquisition finance. As it turned out, we never actually used the acquisition finance, as favourable market conditions enabled us to replace it quite quickly with normal market finance in July. The final stage in the process was to adjust our debt to match predicted cashflows over the next 10 years. We have achieved this now, largely through the launch of four transactions of around Eu1bn in April and July this year, and everything has gone according to plan.
We also have a Eu3.25bn bond due to mature in December. We expect to repackage around half of this amount by medium term debt, with the remainder accounted for by commercial paper and by bilateral loans from international banks. The European Investment Bank has now given its approval for our planned long term loan and the funds from this should reach us by November.
What were the main obstacles to your goals and how have you overcome them?
Market volatility has been a significant factor. To a certain extent, you have to rely on luck when launching a new transaction. Some of our deals this year were well timed, while others were unfortunately not so well timed. On the whole, though, the development of the market over the past couple of years has been positive. The inception of the euro has proved beneficial for borrowers, such as ourselves, while the new, wider European market has absorbed large volumes of issuance, helping to finance M&A activity.
Our acquisition of YPF was the only big deal in the oil sector that was an all cash deal. Our Eu3.25bn floating rate bond, launched in May last year, was at the time an enormous amount, but the liquidity of the floating rate instrument made the transaction viable. We were the first company to fund an acquisition by immediate debt financing, but we were pleasantly surprised that this has now become standard practice. KPN, France Télécom and Unilever have all since followed suit.
What lessons are there to be learned from this year?
In spite of the development of the single currency, the sheer volumes and liquidity offered by the US dollar market make it vital. Our core currency is dollars, although for a long time it was more efficient to raise our capital in euros via the European market and to swap the proceeds into dollars. Until the second quarter of this year, we found that European investors were more willing to buy our paper, but in July a pick-up in the dollar market prompted us to launch a global offering in dollars.
What advantages does debt financing have over other sources of finance?
Our view is that different means of financing are better suited to different situations. Our funding strategy for the acquisition of YPF was highly unusual at the time, although it has since been adopted as normal practice. Almost every financial instrument is present on our books, serving a variety of needs.
What markets have been the best opportunities this year?
The size and liquidity of the dollar and euro markets obviously sets them apart. Besides those, there are a number of other, less central markets that offer an attractive return. We have been keeping a close eye on sterling in recent months. Our perception is that currencies such as sterling and Swiss francs have a lot to offer when it comes to launching smaller, opportunistic transactions. Our larger, strategic deals will probably continue to be denominated in euros or dollars.
Are you satisfied with your transactions this year? Which one has been the most important from a strategic viewpoint?
Our aim was to restructure our debt financing of the YPF acquisition to suit predicted cashflows. We have succeeded in doing this, so the year has been a success. As I mentioned, luck tends to have a say in the performance of a deal, but on the whole we are pleased. The YPF acquisition refinancing was the driving force behind all of our deals, so no single one stands out on a strategic basis.
Have institutional investors become more important to you?
The institutional sector has bought all of our transactions this year. Although we are a popular name with both institutional and retail investors, issuance has been difficult in the retail markets.
We have all sorts of financial instruments on our books and we have shown that we are prepared to raise funds across a variety of markets.
Where do you expect the markets to be next year and what steps are you taking in preparation?
The markets have improved of late and there seems to be sufficient depth to accommodate the forthcoming deluge of telecoms issuance. It is difficult to be certain, though, in our impressions of the markets. For one thing, we are not in a position to predict interest rate moves.
Do investors now look more closely at credit risk when it comes to euro denominated debt, as opposed to previously, when they were more concerned with the risk associated with the legacy currencies?
This is certainly a major trend that we have witnessed over the last year.
It is natural that investors would research a credit more thoroughly nowadays and on both the equity and the debt sides a lot of US culture is spilling over.
The inception of the single currency has created a wider pan-European marketplace. Borrowers now have to compete with a peer group spanning several countries and the race to woo investors has had several effects, including a surge in M&A activity.
Another trend that has emerged is the denationalisation of flows. A year ago, it was unheard of in Spain for portfolios to be brimming with non-Spanish risk, but that is the current situation.
Has the development of the corporate bond market been favourable?
The growth of the euro market has led to a surge in investor appetite for corporate risk. While interest rate rises have softened this in recent months, corporate borrowers were initially given a warm welcome by the market, particularly those involved in the oil industry.
How important is the internet to you, in terms of reaching investors and the marketplace?
We are happy to keep our internet distribution to a minimum for the time being. The value of the medium to the financial markets will only become clear in time.
While the internet has had little impact on our actual distribution to date, it has been more instrumental on the marketing side and we post all of our borrower presentations on our website, as well as sending them out to investors via e-mail.
What do you think will be your biggest challenge in the year ahead?
Our task is now to reduce the level of our debt, while also fostering the growth of the company. We are not expecting to have any serious problems and our significant presence in Latin America, in particular, should offer numerous opportunities for growth. *