Making a debut

There is plenty to think about when you issue a high-yield bond for the first time. David Tilston explains the process

In February, Innovia Group issued its inaugural €342m high-yield bond repayable in 2020. As group FD, this was the first time I had been through such a process and I share my experiences with you here.

The group is private equity-owned and is comprised of two businesses. Its films division is a leading manufacturer of speciality films such as those used in food packaging. Its security division produces polymer substrates under the Guardian® brand, which are used in the printing of banknotes. In March, it secured a contract with the Bank of England to supply the substrate for the forthcoming £5 and £10 notes. The business operates globally, is headquartered in Cumbria, and has treasury skills in its small finance team (although no dedicated group treasury function).

On 10 February 2014, after earlier preparatory work including briefing rating agencies, we launched the bond issue. The bonds priced at Euribor +500bp on 13 February and the bonds (more properly referred to as senior secured floating rate notes, listed on the Luxembourg Stock Exchange) closed on 21 February.

Contractual arrangements

The key contractual item was the 73-page ‘description of notes’ section of the offering memorandum, which, in our case, ran to over 350 pages. This sets out the rights of the note holders and the restrictions that the group has to operate within while the notes remain outstanding.

The concepts around the restrictions were different from those I had experienced before. Previously, I have dealt with facilities that contain ongoing financial covenants.

 While we were on the roadshow, the lead bookrunner ran an intensive communication campaign with potential investors 

Our bond contains an alternative set of restrictions that aim to safeguard the creditworthiness of the group and the security available to note holders as is normal with this type of financing. It permits certain transactions (such as dividend payments and raising additional debt), as long as identified financial ratios are met. Such ratios are only tested on an ‘incurrence’ basis, not on a regular basis, and may not be tested at all if any of the specified transactions are not contemplated during the life of the bond.

Overall, the financing package is relatively flexible compared with bank loan facilities.

The format of these restrictions has developed from practice in the US markets. They provide carve-outs (‘baskets’) so as not to impede normal operational requirements. In some cases, the value of the basket can increase over time, depending on the group’s performance. The various limitations tend to follow a regular format in the description of notes. We reviewed a summary of the common limitations (approximately 30) and what had been achieved in recent issues. This helped us to negotiate an appropriate package with our lead bookrunner in advance of the launch.

Documentation and due diligence

The offering memorandum was subject to a thorough verification exercise to ensure all descriptions and statements about the business could be validated. As we had completed a major corporate transaction during the previous calendar year, we had to include pro forma information to assist in the marketing of the bond to give potential investors a better indication as to what the group might look like going forward. In addition, we needed to include unaudited management accounts through to October 2013, since there was a requirement to include accounts that were produced to a date within 135 days of the issue. The figures for the past three years of statutory accounts were included in the financial pages at the end of the offering memorandum and our auditors needed to provide comfort on certain aspects of the financial information that we provided, which added to the workload.

Roadshow

The roadshow commenced with a confidential sounding out of a small number of market participants. This proved to be helpful, as many of the tougher questions we subsequently faced were flagged at this initial stage. By the weekend, we had confidence that we should expect a reasonable investor appetite for our bonds.
In addition, we held due diligence calls with our auditors and our lawyers to confirm that the financial content of the ‘red herring’, the draft offering memorandum minus final commercial terms, had been fully signed off and all numbers ‘circled’ (ie confirmed by the auditors) prior to printing.

These would be provided to potential investors during the roadshow. We had a further ‘bring down’ due diligence call where the management team confirmed to the lawyers that there had been no material changes to the group’s trading conditions or outlook that needed to be reflected in the offering memorandum.
The audio of our first investor presentation was recorded so that it was available on a secure website – along with the presentation material – for potential investors who we had not seen. As the roadshow progressed, the investors tended to go straight into question and answer sessions dealing with their specific queries.

Evolution of demand

While we were on the roadshow, the lead bookrunner ran an intensive communication campaign with potential investors, dealing with their queries and determining appetite. The management team received progress updates at the end of every day. Our confidence in the strength of demand for the issue increased as the roadshow progressed, although early on it was difficult to judge how successful we would be.

In parallel, the lead bookrunner was discussing potential pricing on a bilateral basis with potential investors during the Wednesday (referred to as ‘price whispers’). It then issued a ‘price talk’ announcement (a firm indication of pricing) over Bloomberg on Thursday morning. As we received offers resulting in a four-times oversubscription, a second ‘price talk’ announcement was issued later in the morning at a slightly lower rate. Allocations were then agreed and commitments locked in during Thursday afternoon. Formal completion occurred the following week (after yet more ‘bring down’ calls and update of the ‘red herring’ with final agreed terms).

Workload

The workload involved in launching such a bond is both immense and intense. We were highly dependent upon a very small number of people in our finance team, who at times almost totally focused on preparatory work for this issue. A shareholder representative who had significant refinancing experience supported us and was important to the success
of the issue.

There were many parties involved. These included our own lawyers; lawyers acting for the lead bookrunner and co-bookrunners; overseas counsel involved in specific legal and security issues; the security trustee; our auditors; the sales team promoting the bond; and other representatives from within the lead bookrunner; co-bookrunners themselves. The continuous requests for information, decisions and conference calls meant that we were constantly juggling priorities. Within the company, only myself and the CEO had a reasonably full overview of the process.

Conclusion

There are plenty of points to consider when issuing a high-yield bond for the first time, so I would recommend seeking the advice of other treasurers. You can also read my tips below.

Lessons learned

  • Ensure you appoint advisers with proven experience in the high-yield bond market.
  • Prepare early, add spare temporary resource where possible and do not underestimate the workload.
  • Focus on the likely restrictions in the description of notes and how these work versus your business requirements.
  • Engage early with auditors to understand their likely work programme.
  • Identify who internally can assist in a thorough verification exercise on the offering memorandum.
  • Be ready to move rapidly if market conditions permit.

Timetable for issuance

  • Wednesday 5 February – Sounding-out process commences
  • Friday 7 February – Due diligence call with lawyers and auditors
  • Sunday 9 February – ‘Bring down’ call with lawyers
  • Monday 10 February – Confirmation of decision to launch; announcement of launch; confirmation of credit ratings; presentation to sales team
  • Monday 10 February to Wednesday 12 February – Investor presentations in London, Paris and Frankfurt

About the author

David Tilston MCT is group FD of Innovia Group

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