Fallen angel HeidelbergCement has weathered the storm and emerged intact largely thanks to its innovative restructuring plan in June. Clare O'Callaghan reports on an intriguing year for the corporate.
HeidelbergCement's ambitious Eu2.6bn financing package implemented in June allowed the world's third largest cement producer to restructure its balance sheet, and move away from a worsening short term debt crisis.
Made up of a Eu404m rights issue, a Eu700m bond and Eu1.5bn three year syndicated loan facility, the restructuring was the biggest challenge the company has faced in its 130 year history.
"It was an ambitious process to close these three deals in parallel," admits Horst Wolf, chief financial officer at HeidelbergCement, who has served on the managing board since 1994.
But it was a challenge the firm met successfully according to Said Saffari, head of European credit research at Credit Suisse First Boston: "HeidelbergCement has done a very decent job at turning the balance sheet around considering the horrific environment it operated in last year," he says.
The financing package enabled the firm to reduce net debt from Eu4.508m to Eu4.182m and cut down on its short term debt in favour of longer dated maturities.
It was a high risk strategy - all the elements of the package were conditional upon each other. Drawdown on the loan was subject to both the completion of the bond issue and the equity rights offering.
Another angel falls
And when in April the company became the latest angel to fall into sub-investment grade territory when Moody's downgraded it from Baa2 to Ba1, the prospects for success were not great.
HeidelbergCement was downgraded due to a combination of reasons, says Lior Jassur, head of European high yield research at Dresdner Kleinwort Wasserstein. Firstly, expansion through acquisitions over the past few years has been funded primarily by debt.
Secondly, the cement price war in Germany meant that the company couldn't make money in one of its main markets, which ate away at its profitability.
But the gamble paid off. Beating all expectations, the high yield element of the restructuring was a storming success. The reason was simple: the deal was exactly what yield-hungry investors had been looking for. "Clearly, search for yield was the first and foremost reason for the demand, particularly from the high yield side which saw HeidelbergCement as a better credit than many other high yield names," says Saffari.
Demand was such that bookrunners Deutsche Bank, Citigroup and RBS Financial Markets were able to increase the bond from Eu600m to Eu700m and price it through the 7.5%-7.75% pre-launch guidance at 7.375%.
"The Eu700m bond issue reduced HeidelbergCement's dependency on banks and diversified funding sources," says Wolf.
The deal remains the largest single tranche high yield bond in euros, beating Messer Griesheim's Eu550m issue. "The transaction sets a new precedent in terms of size in the euro sub-investment grade market," said Brian Bassett, head of European high yield capital markets at Deutsche Bank, at the time.
Addressing credit concerns
In the second part of the restructuring, the firm raised Eu404m in new equity after some 99% of its capital increase was taken up by existing and new investors. "The capital increase strengthened our capital base and fulfilled requirements of the rating agencies," explains Wolf.
The third element of the repair job saw HeidelbergCement replace small, short term bank facilities with a Eu1.5bn syndicated multi-currency term loan and revolving credit facility. The new loan, which has a Eu430m 364 day tranche and a Eu1.07bn three year tranche, was oversubscribed by 30%, enabling it to be increased from Eu1.4bn.
"The syndicated facility increased our overall financial flexibility substantially in terms of amount, maturity, and access security," says Wolf.
Saffari at CSFB adds: "HeidelbergCement completed three good transactions, which were fairly well priced with decent aftermarket performance.
"It is a weak operating environment in Germany but it looks like they will weather the storm, albeit with weaker financial and operating positions."
Hopes and fears
When Moody's assigned a Ba1 rating to the three elements of the refinancing package, the long term issuer rating was downgraded to Ba3. Standard & Poor's rates it BB+.
But the company hopes to reclaim its investment grade rating. "HeidelbergCement remains firmly committed to achieving and remaining in investment grade territory. We continue to work in this direction through a debt reduction programme and a reduction in the level of structural subordination," says Wolf.
However, not everyone is so optimistic. "I cannot see HeidelbergCement regaining its investment grade rating until cement prices in Germany return to a sustainable level," says Jassur at DrKW.
But Saffari does not believe that the company's ratings is the main cause for concern: "The company is operating in a sector that is moving towards junk rating - a similar trend can be seen among its US counterparts."
Instead, he thinks the problem facing HeidelbergCement and its competitors in Germany is high capacity combined with low demand. "The top lines are not going to improve dramatically as they are performing in a weak operating environment, certainly for the rest of the year and probably into 2004," he says. "The main question for HeidelbergCement is whether it is operating at a level of optimal capital efficiency. It has to concentrate now on restructuring its operational side versus its balance sheet."
Jassur's main concern is the company's strategy for Germany: "It is hoping to capitalise on its market position by buying up some competitors, which is a high risk medium rewards strategy," he says. "The company takes on the high risk attached to acquisitions while all survivors benefit from consolidation in the market."
Back to the future
Wolf is happy the company has fulfilled its funding target for this year. And while he expects further strong issuing activity from the high yield sector, "HeidelbergCement has sufficient undrawn credit lines for the next three years so there is no substantial new issuance activity planned in the near to medium term."
The firm's debt issuance strategy is straightforward. "We seek to establish liquid benchmark transactions and supplement these with opportunistic issuance," says Wolf.
