Engineering and construction group discusses the merits of “selling it” when it comes to debt issuance.
When your company issues bonds, sometimes it’s a good idea to really “sell it.” That’s the conclusion of one member of The NeuGroup’s Engineering & Construction Treasurers’ Peer Group, who explained how his team was proactive in marketing the coming sale.
The member related his experience at the group’s recent fall 2012 meeting, which was sponsored by Bank of America Merrill Lynch. The member said week prior to its bond offering the company recorded an “electronic road show,” outlining the details of the offering and offering compelling reasons why investors should pull out their wallets. The result was an offering four times oversubscribed with $2 billion in commitments. The other factor investors liked, the member said, was that the company was committed to a maximum limit for the issue, which signaled that the company would not respond to investor enthusiasm by adding to the issue and over-leveraging itself.
At the meeting, group members covered several other topics weighing on everyone’s mind. This included an update on the banking sector and debt capital markets in light of Basel III and Dodd-Frank, as well as the effect on FX markets of the resulting regulation, and an updated view of the Eurozone crisis.
Members also discussed strategies for public bond issuance, optimizing shared service centers and the future of public/private partnerships. Below are other key takeaways from the meeting:
- Exercise caution with employee stock ownership. While employee stock ownership offers an incentive to employees to ensure their activities are making value-add contributions to the company, there is a risk if employees hold too much of the company stock in their retirement plans.
- “Regarding regulations, everything is uncertain.” This is how meeting sponsor Bank of America Merrill Lynch summed up the regulatory environment. However, one thing that is certain, the bank said, is that banks’ capital will become more expensive, even if it hasn’t yet.
- Banks are eager to lend and provide services. In spite of regulatory uncertainty, 2011 was in fact a record year for lending at BAML, but 2012 has been slower and 2013 is expected to be more like 2012 than 2011. Additionally, BAML expects future credit business to be more specialized, such as for M&A deals and term debt for capital expenditures rather than unfunded revolvers. Bank focus on ancillary business and broader profitability is real.
- Dodd-Frank and FX. ISDA protocol and “business-conduct rules” seek to put documentation and standardization around current trading activity and allow for full automation. The protocol can be utilized even without using ISDAs. Also, counterparties technically will not be able to trade beyond spot transactions outside of the rules after January 2, 2013.
- Is single A the new triple A? The large too big to fail banks have lost their AAA ratings with some dropping into single A status. If this is characteristic of the industry then all financial counterparties are likely to be out of compliance with policies. Since there is no place to go for mitigation there is no option but to lower your hurdle.
- The SSC concept may need to be sold internally. Business units with a history of decentralized independence are often reluctant to give up control of any part of their operation. However, one member has had success in rolling out SSCs in multiple locations by giving BUs input and buy-in into the initiative. Consensus is that it is easier to start from scratch when opening an SSC, rather than leveraging existing operations.
- P3 projects need special treatment. Several members noted that their P3 activities are run in a separate organization, which are tasked with scrutinizing potential deals for returns and risk, and ensuring the counterparties are appropriate for the company. Designing and sticking to your deal parameters will improve the likelihood of better returns with lower risks.
- The worst eurozone fears are not materializing. With the peripheral credit crunch we can expect to see corporate lending rates remain elevated in the periphery for some time. These countries need to export their way out of debt, but they cannot become globally competitive overnight. However, the ECB is doing its best to contain euro-exit risk. Notably, the eurozone as a whole can actually afford the crisis. So we are unlikely to see any break-up in the near future provided the wealthier countries remain as such and are amenable to further support of the struggling countries.
The next E&C meeting is tentatively scheduled take place June 4-5, 2013.