Currently group treasurer at AstraZeneca and a former head of corporate finance at Rio Tinto, Jono Slade has long experience of deal and adviser management and investor relations. We asked him for the organisational principles that ensure deals stay on track.
As deputy treasurer of funding and investment at National Grid, Kwok Liu looks at what good advisers can and should bring to a transaction, and shares his perspective on how to build relationships that help avoid the pitfalls and bear fruit.
A group of bankers walks into your office pitching for your next deal. They bring a slick presentation with case studies of their recent deals and the obligatory tombstone pages at the back to highlight their strong track record. Should you need further convincing of their capabilities, they will gladly oblige with whatever follow-ups you might require. Then you meet with another one of your relationship banks who will set out, just as convincingly, why they should be on your next deal, and so on. Sound familiar?
So, what should banks bring to a deal, and how are they best managed?
For us, two of the key requirements are intimate knowledge of forthcoming deals and recent deal experience, ideally in your sector.
Why are these factors key?
If investors are familiar with your company and markets are in exuberant mood, it is possible that your choice of banks has little impact on the success of your deal. However, even for a frequent issuer like National Grid, if a transaction has a long lead time, the markets may not be as strong by the time your deal takes place. A bank with the most information on the deal pipeline will help you time your deal, and also determine whether some of the supply dynamics matter.
Keeping the core group of deal banks small helps with managing the group
Similarly, recent deal experience is crucial to a detailed understanding of investor behaviour, down to the level of being able to anticipate how large, deal-driving investors are likely to behave. This should prevent the wrong pricing strategy, which at worst could lead to investors naming the price at which they are prepared to invest. And if you have insufficient flexibility to move pricing higher or be unwilling to, the deal will fail.
Other factors that we believe are important are:
Keeping the core group of deal banks small helps with managing the group. This will help prevent the voices you want to hear from most from being drowned out by a large group. In the drive to find consensus in a large group, a smaller group could help prevent a strategy that is too conservative.
Finally, it’s important to establish very early on what your expectations are for the transaction, and to maintain a dynamic dialogue as the transaction evolves. Springing surprises on your bank group at the sharp end of execution after they have reached a consensus could cause a damaging delay or an unnecessary stand-off.
Associated British Ports group treasurer Shaun Kennedy is taking an active approach on LIBOR transition and offers advice on managing the risk-free rates environment for transactions going forward.
LIBOR has been around for more than 50 years. A cutting-edge innovation at the time, it became one of the most important and widely used financial benchmarks. My entire treasury career has only known life with LIBOR, but its ubiquity was its downfall and the LIBOR era is coming to an end.
Risk-free overnight rates are the future, and for GBP that means utilising the sterling overnight index average (SONIA). Treasurers therefore need to adapt to using the new overnight benchmarks. This means understanding how to use risk-free rates across most existing financial products that reference LIBOR.
As treasurer of Associated British Ports (ABP), with a large existing long-term exposure to LIBOR, we have taken an active approach to the end of LIBOR and the new risk-free rates. Our view is that LIBOR represents a significant financial risk and we have taken the lead with our financial counterparties to ensure we transition to SONIA on our terms and timescales.
When it comes to new transactions, ABP took the decision in late 2018 that we would no longer enter into new LIBOR-linked deals. With our focus solely on using risk-free rates, we have been determined to make risk-free rates work for us. What have I learnt from all this?
Here’s my advice for future transaction work:
• Work through from first principles the interest rate conventions for the risk-free rates and the variations that are evolving across markets and products.
• The new risk-free rates have a lot of benefits for corporates beyond being based on actual transactions. Understand these benefits and embrace them.
• Consider how your systems and end-to-end processes will work utilising these new conventions.
• Consider all aspects of legal documentation. Maybe even look to set new precedents.
• Consider the accounting implications – of which there are many.
• And where accounting goes, tax tends to follow, so consider any potential tax consequences.
The number one thing I have learned, though, is that there is no one solution; all users of financial markets will have different views and requirements as part of this change. Don’t think that banks have all the answers on LIBOR – I can assure you they don’t. Question everything and take nothing for granted.
ABP continues to learn lessons and evolve plans. I can only encourage all treasurers to fully engage in this process and help shape the future of finance for many years to come. The biggest mistake would be to sit back and do nothing until it’s too late.
Katherine Horrell is group treasurer at the Automobile Association and formerly group treasurer at Centrica, where she led numerous bond issues and worked on two equity issues. Here, she gives her perspective on managing the sometimes delicate relationship between corporates and rating agencies.
Credit ratings are a crucial part of the fundraising process, so staying engaged with agencies is important. Open and frequent dialogue, particularly in advance of a funding round, should be part and parcel of your deal management fundamentals.
The foundation of that communication should be making sure that they understand your company as fully as possible and that you understand their methodology and how it applies. When a rating agency relationship works well, the company and agency can work together to ensure the most appropriate application of a methodology to the business. Ensure you continue the dialogue. On the one hand, you’ll want to highlight the positive side of their assessments while chipping away at more challenging aspects of their review.
Get to know your analyst, but also try to talk to other members of the credit committee as part of your communication effort. In my experience, the analyst isn’t always in touch with the thinking of his or her committee, and apparently fruitful conversations with the former don’t always lead to happy outcomes with the latter.
If your rating is under pressure or close to a downgrade, the agency should be prepared to give your business more focus and be willing to pick up the phone to discuss their rationale. They will often appreciate more information from your side. Meeting some of your business leaders from outside the finance function can be beneficial. If you’re intending to put colleagues from other departments in front of analysts, some preparatory work as to the questions they might expect will be advisable.
When it comes to fundraising, investors’ attitudes towards rating agencies can vary. In the sterling bond markets or US private placement market you are likely to encounter analysts on the investor side who have done their own research and hold strong views. In the US and euro public markets, many investors and analysts have very little time to spend on getting to know your business in depth. These investors can be very agency-dependent, so be prepared to put your case and to put key information across.
In recent years, while credit has been readily available, you may have found that credit ratings had limited impact on your ability to raise money. But in more fragile times like today, your rating may have an impact on when you can access markets and have more effect on the pricing you can achieve.
Be aware that investors talk to rating agencies frequently; the agencies see them as important users of rating information.
One of the most important principles of deal management is to ensure that you are comfortable with your disclosures, especially now while the business environment is changing so rapidly. If you think a change in rating is in the offing, disclose that in your risk messages in the prospectus and make that possibility clear in discussions. Full disclosure is always the better option, even if you want to present your business in the best possible light.
Above all, understand your business strategy and have a clear story for investors and credit rating analysts alike.
