The £2.7bn recapitalisation for Invensys this spring included the most controversial bank debt financing of the year. Invensys took flak around the market for appointing Deustche Bank as a sole lead for the bond and loan. Despite Deutsche's failure to bring sub-underwriters into the deal, the bank has managed down its exposure and Invensys has time to turn itself around. Adam Harper finds out how.
By late February this year, the £2.7bn recapitalisation for UK engineering firm Invensys appeared to be under attack from all sides. Deutsche Bank had scooped the sole mandate to underwrite and arrange the loan element, to arrange the high yield bond issue and to act as joint bookrunner with Morgan Stanley for the £470m equity increase. Deutsche was taking most of the heat as Invensys' other relationship banks, frozen out of the deal's top level, turned on the plan with a fury.
In the bond market, investors were complaining about the lack of restrictions on Invensys' debt and the structural subordination set out in the language of the two tranche Eu475m and $550m high yield bond.
In the syndicated loan market, the £1.6bn loan package was rejected by each of the ? at least six ? banks Deutsche invited to sub-underwrite the deal. Relationship banks were outraged that Deustche had the sole mandate and were perhaps envious of their competitor's lucrative fee-take across the financing.
?Normally if you do a risky deal, you bring in four or five banks together at the top level and find a consensus structure and price,? said one head of loan syndications at the time. ?We have a saying in this business, that hogs get slaughtered.?
Since Invensys already had the money through Deutsche's underwriting, bankers argued, sub-underwriting the loan could only help Deutsche, not Invensys.
Not even the offered share in the bond's lucrative fees could tempt Invensys' senior relationship banks to sub-underwrite the deal. Bank of America, HSBC, JP Morgan, Morgan Stanley and Royal Bank of Scotland had all lent to the company in a 2002 bridge deal, but would not commit on this occasion.
It could have been because they were unhappy with Deutsche's sole mandate, but there were other factors. ?The Deutsche issue did not form part of our analysis,? said a loans originator at the time. ?It was simply a decision by our credit authorities to recover our £100m exposure at par.?
Even the ratings agencies put the boot in. In late February, Moody's and Standard & Poor's cut Invensys' senior ratings to B1/B+ from Ba3/BB-. The already lower ratings on Invensys' outstanding bonds ? the $250m 2007 and $200m 2010 notes ? lost one notch from S&P and three from Moody's to come out at B3/B-, the same level as the new high yield bond.
Invensys needed the money quickly, as Brian Bassett, head of high yield at Deutsche Bank in London, explains. ?Over the 18-24 months before the transaction, Invensys had gone through a couple of different business strategies and a lot of their businesses had been hit hard by the change in the economic cycle,? he says. ?Like other former investment grade companies, its capital structure was bank debt heavy and short-dated.?
This ticking clock was one of the main reasons Invensys took the controversial decision to mandate just one bank to arrange all the debt financing. ?Dealing with only one party not only reduced execution risk, it facilitated ease of negotiation in what was a very tight time scale,? says Will Spinney, group treasurer at Invensys in London. Invensys would do the same again in the same circumstances, adds Spinney.
It took time for Deutsche to reduce its exposure in some areas of the underwriting. The £350m term loan ?A', part of the £1bn in bank facilities that no banks wanted to sub-underwrite, was paid down through two disposals ? it sold US power supply business Powerware and manufacturing company Hansen Transmissions for $560m and Eu132m, respectively, in June.
Other parts of the financing were placed more immediately, although Invensys had to pay up for this to happen. The bonds widened from a 9% yield in the prospectus to a final annual yield to maturity of 10.255%, paying a 9.875% coupon on a 98.147 issue price.
In the loan market, investors also had to be offered the sweetener of market flex. The margin on the £378m term loan ?B' rose from Libor plus 300bp to 350bp and Deutsche added a 25bp front-end fee. The margin on the second lien loan climbed from 425bp to 475bp. But this flex was enough to bring in more than 200 institutions on both sides of the Atlantic, leading Deutsche to claim the £645m placement as the biggest ever for a European corporate in the institutional market.
?It was very nice to see that take-up,? says Invensys' Spinney. ?Given the response, we would certainly look at that market again.? Deutsche's Bassett argues that the positive response from institutional investors was the key indicator of the transaction's success, and says that the bank market's hostility was not embarrassing for Deutsche.
?The people we sold the institutional paper to make risk and reward decisions for a living and they were comfortable with the financing and the credit,? he says. ?It would have been embarrassing if we couldn't have sold to them.?
Bassett says the financing's success has been proved by the debt's secondary market performance. The bonds trade at 104.00/105.00, up about 6bp; the ?B' loan trades at 101.00; and the second lien paper in a 102.00/103.00 market.
Despite this encouraging performance, however, bankers say Invensys is unlikely to issue again in the near future, and note that its nearest maturity is in 2009. Invensys' Spinney says his company's long term strategy is to regain an investment grade rating. However controversial, the Deutsche-led recapitalisation has certainly bought Invensys time to move in this direction.