Crisis puts debt on deal radar

14/01/2009 - 22:00


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DEBT is a theme across all the top deals of 2008, something that hasn't featured previously because such matters were considered relatively boring in a market awash with cheap credit.

Crisis puts debt on deal radar

DEBT is a theme across all the top deals of 2008, something that hasn't featured previously because such matters were considered relatively boring in a market awash with cheap credit.

With a banking crisis claiming several of the world's financial leaders, locking down new credit and investors seeking to deleverage, debt-linked deals have been better appreciated by the market.

Iluka Resources' $500 million long-term debt refinancing in March, at 135 basis points above the Libor benchmark, was combined with a $323 million equity raising which CEO David Robb said was a tricky balancing act.

"The debt wants to know the equity is there and the equity wants to know the debt is there," he said.

Mr Robb said the decision to go ahead and recapitalise the company was to de-risk the projects it had, and therefore the whole company.

After announcing the deal, Iluka was criticised by some investors who felt asset sales, project deferral or even simply holding off altogether could have been better options.

Mr Robb said all these were considered.

"We felt at the time you could mount an argument that we could wait and conditions could be easier; in fact we were fortunate in going ahead," he said.

At the time he thought the debt taken on - a straight corporate facility without project finance obligations - was expensive and medium term. In today's conditions it now looks cheap and long term.

Wesfarmers also included significant debt components in a $4 billion refinancing package announced in April, with around $1.5 billion of that in refinanced debt or five-year bonds. It also secured a commitment to renew its $1 billion working capital facility with an average margin on all one to three year debt less than 100 basis points.

Both grains business Co-operative Bulk Handling and yellow goods player Emeco stitched up sizeable pure debt deals that they believes sets them up to take advantage of market changes.

In the case of CBH, it needed to nearly double its debt facility if it was to take advantage of the changes in the grains market, which had led to AWB losing its wheat export monopoly.

CBH believes it can shift its market share from around 30 per cent to nearly 50 per cent, but had to have the funding on hand to make that commitment. It sealed the deal just before the markets really blew up, but several bankers acknowledged it as a significant achievement.

"It was absolutely critical to have the funding in place to take a significant part of the wheat market going forward," CGH Group CFO Allyn Wasley said.

Emeco rents equipment like trucks and diggers to mining companies. That exposure has hammered its share price but the August 18 announcement of a three-year, $630 million senior debt refinancing deal - even at 130 basis points above the previous arrangement - looks very well timed, given it had a year before it had to refinance.

West Perth-based Emeco, which did not reveal the actual cost of the debt, reckons that cash-strapped miners are going to want to rent its equipment rather than buying their own and it now has the balance sheet to meet that demand.

The company's CFO, Stephen Gobby, believes the decision to bite the bullet on debt has positioned Emeco to take advantage of the downturn and admits he would not like to be in the market now seeking to refinance the previous debt, which would have matured in July.

"We are observing in the current market that funding rates for our level of credit rating are probably another 100 basis points above the margin we are paying, based on our discussion with different banking sources," Mr Gobby said.

Another big deal noted by bankers was property developer Peet's $300 million January purchase of 243 hectares of beachfront land at Alkimos, which was significantly debt-funded via National Australia Bank.

Griffin Energy was also in the market early last year, seeking about $1 billion for the next phase of its Bluewaters power project at Collie.


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