Published: October 01, 2013
The Weir Group has undergone substantial strategic and organisational change in recent years, moving from a more traditional UK focused engineering conglomerate to a global business concentrating on three key end markets of minerals, oil and gas, and power. To achieve this, the company has undertaken a number of divestments and acquisitions and in the process changed the make-up of the balance sheet position substantially. Like many organisations, The Weir Group has historically relied on bank credit facilities as the sole source of debt funding. Prompted by the financial crisis, we made the decision to conduct a capital management review which was presented to the board in, 2009. In particular, we were concerned about the potential impact of the crisis on the availability and cost of financing, and we also wished to review our funding options given both our strong cash generation and ambitious growth aspirations.
As part of the funding review, we recognised the need to diversify our funding sources and reduce our reliance on the banking sector. In particular we were seeking longer dated financing, with a spread of maturity dates to reduce our re-financing risk. Our strategy needed to anticipate future funding needs linked to acquisitions, and as funding diversification would involve a new investor base, developing brand awareness would be important, as would setting up documentation templates to allow efficient, timely financing in the future.
The Weir Group does not have a credit rating from the agencies, so our funding choices are more limited than some. As a result of this, and the conclusions of our funding review, we identified the US private placement (USPP) market as an attractive source of funding. As the private placements involve securities sold to a small number of sophisticated investors, credit ratings are not required, and there was considerable potential investor interest, particularly as much of our strategic growth is derived from North America.
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We initially started with a small USPP of $250m in January 2010 issued on direct basis. This was the first bond issue that Weir Group had made, with 5 and 8 year tranches, allowing us to extend our maturity profile to match our corporate strategy. By negotiating directly with four investors, we were able to secure competitive terms and conditions, with tenors of 5 and 8 years at an average rate of 4.8% achieved.
This debt issuance was also significant in that it gave us the confidence and experience to access this market in the future. After January 2010, we again issued paper to the market. The acquisition of Seaboard was completed at the end of 2011, initially through bank financing, and Novatech in 2012. To finance the Novatech transaction, and repay existing borrowing facilities, including funding for the Seaboard acquisition, we issued notes of $1bn over 7, 10 and 11 year maturities via the USPP market with a coupon of 4.16% in February 2012.
There are a variety of issues to consider when accessing the USPP market which differ from other, perhaps more familiar funding sources. With a small number of investors representing a substantial proportion of total funding available, it is possible to engage directly with investors. This is not necessarily the case when accessing the public bond markets where there is a greater number and diversity in the investor base. Investors in USPP are keen to understand the company and its strategy in detail, so an information memorandum is important, and it is often valuable to start a dialogue even without a specific deal in mind so that investors can build up their knowledge of the company in advance of an issue coming down the tracks.
As a result of our two issues in the USPP market to date, we have established a flexible financing model that supports our long-term funding needs. Our debt maturity portfolio now extends from 2015-2023 with reduced refinancing risk as there is less concentration over a single period. The cost of issuance is highly competitive. We have established a relationship with a new group of investors and although we have already issued $1.25bn under a USPP, there is further capacity available for the future. Our USPP issuance is complemented by an $800m multilateral revolving credit facility which covers our short term liquidity needs resulting from seasonal cash flow, and allows us the flexibility to make bolt-on acquisitions.
Our relationship banks have, by and large, responded positively to our decision to access the capital markets through the USPP market. Under Basel III and other regulatory and market constraints, balance sheet lending is becoming more costly for the banks. They are also keen to see a logical, clear long-term financing strategy and can still benefit from our funding activities through acting as agents to our issuance if required. Our on-going debt management policy has enabled Weir to access efficiently the appropriate funding solution, depending on whether we need core long-term funding (USPP) or more flexible short-term sources (banks).
Looking forward, our funding strategy will be acquisition-driven, with significant capacity to issue in the non-rated markets, such as USPP, convertible bonds and other sources available.. Having established a clear and flexible long term financing approach, our next challenge is focusing on enhancing our trade finance activities which are becoming more complex. With a small but highly professional team, we are also engaged in minimising our operational activities, to allow us to spend more time on the activities that drive growth and directly benefit the business.
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