Tranche 1: Eu500m
Maturity: February 4, 2010
Issue/re-offer price: 99.894
Coupon: 4.375%
Spread at re-offer: 43bp over mid-swaps
Tranche 2: Eu600m
Maturity: November 4, 2013
Issue/re-offer price: 99.634
Coupon: 5%
Spread at re-offer: 63bp over mid-swaps
Launched: Tuesday October 21
Joint books: Barclays Capital, Citigroup, Credit Suisse First Boston, JP Morgan
Borrower's comment:
The main purpose of accessing the debt capital markets was to partially finance the BBAG acquisition made at the beginning of the year, which was concluded a week ago.
The enterprise value of BBAG was Eu1.9bn (including Eu400m of debt). The BBAG portfolio contains the leading brands and breweries in central and eastern Europe and provide us a platform for significant synergies and further growth for the premium Heineken brand.
We wanted to finance this acquisition through a mixture of long term fixed rate debt and a five year bank facility.
We wanted to stretch our maturities over a longer period of five to 10 years and six and a quarter years was a good complement to the 10 year maturity.
The six and a quarter year was aimed more at capturing strong retail demand, while the 10 year was more institutionally focused. The strength of the brand recognition and the reputation of the company worked very much in our favour.
A lot of questions have been raised about the fact that we are unrated. We are not and do not intend to be a regular issuer in the bond market.
In this instance the purpose of the transaction was specifically aimed at financing the BBAG acquisition. Therefore the management decided not to go through the whole process of getting a rating but rather focus on the integration of BBAG and cash generation to bring the group financial ratios closer to their level before the acquisition. Our strategy is focused on autonomous growth.
The decision not to obtain a rating was not taken lightly. But there were clear indications that there was demand among investors for the Heineken name on an unrated basis. The Heineken business model is relatively straightforward and there is high transparency in the way the company is run.
Investors showed a huge amount of confidence in our name - we are the first unrated corporate to issue a 10 year Eurobond and at a competitive spread. We have succeeded in lengthening our maturity profile and diversifying our source of funds.
The roadshow presentations went well with investors gaining additional confidence in our management team after meeting us face to face. The two key issues raised by investors were the lack of a rating and the company's level of subsidiary indebtedness.
However, we made it clear that the debt level is modest and is historically concentrated in three big operating companies.
The fiscal reason for this indebtedness to be concentrated at the level of operating companies is driven by Dutch law, which states that interest on acquisition financing is not tax deductible. The law has been changed recently, allowing more flexibility in regards to any future acquisition financing.
In addition to the standard covenant package, the bond has a covenant that limits the level of subsidiary indebtedness at 35% of the total consolidated group assets.
One strong credit factor is that the Heineken family retains a controlling interest of Heineken and maintains a conservative approach towards the way the company is run. Furthermore, Heineken enjoys well diversified cashflows and profit sources unlike our competitors, whose profit pools are concentrated in a couple of geographic areas.
We are happy with this transaction, we got the target amount, ideal maturities and competitive pricing. Not only was the deal substantially oversubscribed but the order book was full of high quality investors.
The four bookrunners - Barclays Capital, Citigroup, CSFB and JP Morgan - did a great job of managing the transaction.
Bookrunners' comment:
This is the largest unrated bond financing in the euro market and the only 10 year unrated deal. But while unrated issues are typically tough to sell investors on, the Heineken transaction was exactly the opposite - both tranches were heavily oversubscribed.
Heineken is a debut borrower in the euro market and is obviously a phenomenal brand name. However, there were a couple of things to overcome - first the lack of a rating and second the perception of structural subordination as the transaction was issued by the holding company as opposed to the operating companies. But these questions were addressed during the five day roadshow and investors were comfortable with the story.
This is a one-off transaction relating to its acquisition of Austrian brewer BBAG and the company does not expect to return to the bond market again in the near term.
For that reason it did not want to focus management time and money on getting a rating. But, should Heineken become a more regular borrower, then it has indicated that it would approach the rating agencies.
We did not think that the lack of a rating would compromise the company's access to the markets and indeed that proved to be the case.
On the question of structural subordination, much of Heineken's previous outstanding debt was in the operating subsidiaries rather than the holding company as it was more cost effective under Dutch tax law.
That law has changed in the last month and, as a result, the company was able to finance at the holding company level without penalty. However, to protect investors against structural subordination, there is a covenant embedded into the transaction, which limits the amount of debt at the operating companies to 35% of group assets, and investors were comfortable with that.
We went out on Monday with formal price guidance of mid-swaps plus 45bp-50bp for the February 2010s and plus 65bp-70bp for the 2013s. The order book built quickly, all of it at the tight end of the range, and we felt we could afford to squeeze the price to 43bp-45bp and 63bp-65bp respectively.
We lost a couple of institutional orders at the tighter levels, but the majority of the book held together and we were able to price at the tight end of the ranges, at 43bp and 63bp respectively.
The book for the 2010s came in at Eu1.7bn and for the 2013s at Eu2.7bn.
The February 2010 maturity was chosen to put some space between it and Heineken's 2008 revolving credit facility and to avoid any contamination with the 2013 issue.
In pricing the deals, we looked at various brand names, including LVMH, McDonald's, Carrefour and Carlsberg, and Dutch issuers such as Rodamco. But really the pricing was determined by the roadshow and where investors positioned the credit.
A consistent message was that Heineken was clearly a minimum of a single-A but a premium was necessary because of the lack of rating. But, because of the strong name recognition and expected retail involvement, which would lead to secondary market performance, the premium was modest.
Distribution was broad across Europe for both tranches. Switzerland was the most important area for the 2010s with 25%, followed by the UK with 22%, France and Benelux each with 17%, Germany 5%, and the rest of Europe 14%.
Retail, retail intermediaries and banks dominated taking 38% of the paper. Fund managers took 32%, insurance companies 26% and pension funds 4%.
In the 2013s, the UK accounted for 36%, France 14%, Switzerland 10%, Austria 10%, Netherlands 8%, Italy 6%, Germany 5% and the Middle East 3%, the balance was split between Scandinavia, Iberia and Belgium.
By investor type, we had fund managers with 39%, banks, retail and retail intermediaries 31%, insurance companies 28% and pension funds 2%.
The 2010s were priced at 53.9bp over the Bund and the 2013s were priced at 73.7bp over the Bund. The 2010s are trading at 51bp/49bp and the 2013s are trading at 71bp/69bp on Thursday.
This is a great performance, given the volatility of the secondary market, they are a vision of stability.
Market appraisal:
"...the borrower is a well known name in the market. Although it is not officially rated, the implied double-A rating from analysts makes it quite a high quality corporate. After its acquisition of BBAG the Austrian brewer, made some time ago, this implied rating did not change.
This is Heineken's inaugural offering in euros and it has been hugely successful. Books were about four times oversubscribed on each tranche. Price talk for the six year tranche started at about 50bp-55bp over Bunds and 70bp-75bp on the 10 year.
This was revised on Monday morning to 45bp-50bp for the six year and 65bp-70bp on the 10 year. The deal was finally priced at 43p over mid-swaps for the six year and 63bp over mid-swaps on the 10 year. This was a good result, but it could have been expected.
Demand came mainly out of the Netherlands and we expect follow-on interest.
Our allocations were severely cut back and we almost had to fight for the bonds due to Heineken's success with this transaction.
The bonds were trading tighter on Tuesday. The six year tranche was 49bp over Bunds at bid having launched at 53.9bp and was 6bp tighter on the offer side. Since Wednesday morning there has been some selling pressure and it is now trading at about 53bp on the bid side.
The 10 year is also trading tighter at about 68bp over Bunds at bid, having been launched at 73.7bp. On the offer side it is trading about 3bp tighter, and there has been some profit-taking today.
We are now seeing demand for new issues that was not seen back in September. Most bonds launched recently are working well, with AEM Milano's transaction being well received, KfW's strong deal, and the covered bonds also selling well.
We are seeing interest for the longer part of the curve as well, with the exception of KfW, which is a three year offering."
"...this was an interesting trade. Price talk was revised three times which may seem like a lot but the credit generated a lot of demand despite not having a rating.
The company's ratios are good and it has positioned itself in the single-A category. The deal pays a minimum premium and it was helped by strong market conditions."
"...the company is not rated so we didn't participate. The bond was much too expensive compared to other unrated companies."