Published: October 01, 2013
On 8 August 2013, Willis Group Holdings completed a $525m bond issue. The net proceeds of the offering, together with cash on hand, were used to fund a $521m tender of Willis bonds. The offering represented Willis’s first debt issuance in two and a half years and its inaugural 30-year offering.
Under the leadership of Dominic Casserley, who took over as CEO in 2013, Willis’s medium-term strategy is focused on increasing both cash flow and earnings per share through organic growth. However, from time to time, we will also consider acquisitions and divestitures as ways to drive growth. We will consider inorganic actions using a set of decision criteria with a focus on the net present value of our actions. We need to invest where there is growth. This will, of course, mean investing in Asia, Latin America, Africa, Eastern Europe and the Middle East. However, this also means focusing on growth areas and industries in North America and Europe, and reducing spending in lower growth areas. In short, Willis is adopting a disciplined approach to portfolio management and M&A, but investment for growth is in the cards.
So what does that mean for capital management?
[[[PAGE]]]
We undertook a thorough review of our capital management strategy, involving a cross-functional team of Treasury, Investor Relations and Tax. The working group considered Willis’s financial position and the various available options to advise management on how best to finance its plans.
Our first conclusion was that Willis should maintain its investment grade credit rating. While it may be tempting at times to consider leveraging up, returning capital to shareholders, reducing the cost of capital by simply being less equity financed and benefiting from increasing earnings per share, there are other important factors to consider. Giving up our investment grade credit status could be viewed as a one way street: easily done but not so easily reversed. There is no natural way back except through some form of equity issuance. Also, the sub-investment grade borrower is far more dependent on creditors, and may lack the financial flexibility to act when the right M&A opportunity presents itself. Another factor that would impact flexibility is that debt issued by non-investment grade companies will include covenants that can be far more restrictive on the daily operations of the issuer as well as its ability to execute longer term strategic transactions.
Our next decision was to secure greater financing flexibility for Willis. This flexibility can be achieved in several different ways so we undertook a holistic review of our various sources of financing to achieve the optimal capital structure which would involve a review of our credit facility and bond profile.
Our starting point was our existing primary bank facility, consisting of a $500m revolving credit facility (RCF) plus $300m term loan, maturing in 2016. We engaged in a dialogue with our lead banking partners to discuss our strategy and seek their feedback and support before formally launching an amendment and extension of the facility. Following a broad syndication strategy, we were able to extend our facility by 18 months to 2018 and increase the commitments under the revolving credit facility by $300m to $800m. We were pleased to see that all our lenders supported our proposal, with two new banks joining the lenders’ group.
We also carried out a comprehensive review of our $2bn portfolio of outstanding bonds. While there were no maturities before 2015, there were a cluster of bonds maturing in 2015 through 2019, which represented an opportunity. Again, we had discussions with our core banking partners, who indicated that the bond market would be receptive to a new issue by Willis, allowing us to capitalize on record low rates. We concluded that refinancing and extending these bond maturities, as we were in the bank market, was a prudent process to undertake.
However, the bank financing had to come first and we were concerned that the attractive levels in the bond market might not persist as trends in the capital markets were pushing interest rates higher, particularly the chatter around the Fed’s tapering of its QE3 asset purchases. The very introduction of this topic in June had sent shock waves through the interest rate markets and had started to push interest rates higher. The solution was found in a Treasury rate lock, which fixed the underlying yield in US Treasuries, leaving us free to concentrate on the bank financing till we could access the bond market.
In July, with the bank financing almost complete, we launched a waterfall tender for Willis bonds maturing in 2015, 2017 and 2019. As is typical in these transactions, the tender offer included an incentive for an early submission, giving us an early indication of the likely success of the tender offer. Our actual bond offer was then tailored to closely match the tender. Management at Willis were particularly keen on extending our maturity profile, to ensure funding for the long term, and to capitalise on record low interest rates. Therefore, the bond offer was for 10 and 30 year maturities.
The joint book-running managers for the offering of the new issue were Barclays Capital Inc., Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC, Lloyds Securities Inc., SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC. Willis Capital Markets & Advisory served as transaction advisor. Weil, Gotshal & Manges LLP acted as Willis’s legal advisors.
The result was $250m of 4.625% 10-year bonds, and $275m of 6.125% 30-year bonds issued to the market. The weighted average maturity on Willis’s debt profile was extended from 4.5 years to 8.4 years and the weighted average coupon decreased from 5.32% to 5.10%. (See figure 1.)
Click image to enlarge
This was an outstanding result, but in treasury, quality is not only in the debits and credits. The success of the transaction was based on a range of factors:
The bonds freed to trade 5bps tighter in the secondary market, which represents a very good balance between deal performance and tight pricing for the issuer.
We all know that banks like to lend umbrellas when the sun is shining, and want them back when it rains. We decided the best response is to borrow an umbrella when the sun is indeed shining, and make sure we can hold on to it.
I consider treasury a team sport, and this latest experience has confirmed my view. In order to get a transaction under way and over the finish line, it is imperative to get genuine buy-in from all relevant internal parties. It is time-consuming to take everybody through the process and set out what their individual role is, but it is time well spent. I am grateful to my colleagues, advisors and banking partners, who have shown commitment, professionalism and ability to make the broader capital management exercise and related tasks a resounding success.
How do you know when to go to market? Naturally we wanted to catch the optimum point in time, but we will only know with hindsight when that will have been. It helps to take a strategic view, look at general market conditions and borrowing costs, make a decision, then live by it and be prepared to execute your plan with speed to capitalize on the market opportunity. A sensible goal based on the prevailing market situation at the time helps to shape a decision; forever chasing the last basis point does not.
By revisiting our capital management strategy without the burden or the time pressure of an upcoming debt, bond maturity, or an imminent M&A deal waiting to be funded, we were able to take advantage of optimal market conditions and better position Willis for the future.
The most valuable lesson for us has been that a capital management strategy should be subject to on-going and continuous review based on business strategy, not a response to immediate necessities.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
