Australia deals of the year 2002

In our inaugural set of awards honouring capital markets achievement in Australia, FinanceAsia announces the winners for deals completed in 2002.

Best Overall Deal

Sydney Airports Corporation Sale

Advisers to the Government - Salomon Smith Barney

Deals like the sale of Sydney Airports to the Southern Cross Airports Corporation come but once in a blue moon. The monstrous A$5.59 billion price tag paid by the winning consortium led by Macquarie Bank was a stellar outcome for Australia's Commonwealth Government which was advised by Salomon Smith Barney. While Macquarie was criticized after the deal for paying too much in the three-way bidding war (equating to 24.7 times 2001A EBITDA), there are few who will deny that Sydney Airports is a prized asset. SSB handled its mandate skillfully.

The sale was originally slated for September 2001, but the bank advised the government to postpone following the terrorist attacks in the US and the collapse of Australia's second domestic carrier Ansett. SSB's shrewd advice was rewarded when the government tried again in June 2002 and received three fully-underwritten bids.

The key equity investors in the winning Southern Cross consortium included HOCHTIEF Airport, Ferrovial Aeropuertos and a specialist airports fund launched by Macquarie Bank. The sale then led to some of the largest and most successful debt and equity-linked issues in the market's short history.

In August, Commonwealth Bank, Barclays Capital, Royal Bank of Scotland and SG Australia provided a A$3.95 billion financing package that included a A$2.45 billion loan syndication and a A$1.5 billion bridge facility. The 364-day bridge was then successfully re-financed in October via a triple-A credit wrapped bond deal lead managed by Commonwealth Bank, Barclays Capital Markets, Macquarie Bank and SG Australia, with offshore investors taking 30% of the issue.

There was also an innovative issue of floating IPO exchangeable reset securities - a A$600 million transaction structured by UBS Warburg and Macquarie Bank (see Best Equity-Linked Deal). Overall the sale of Sydney Airports Corporation was the best deal of the year in Australia.


Best IPO

BHP Steel

ABN AMRO Rothschild and CSFB

Once nicknamed the Quiet Achiever, BHP has had more than its share of dud financial deals in the past. But the A$2.2 billion spin-off and listing of its subsidiary BHP Steel in July 2002 was an achievement worth shouting about. The intention to list BHP Steel was announced in March 2001 following the dual listing exercise by its parent, which saw BHP Limited and Billiton plc merge to form BHP Billiton.

A spin-off was considered the best way for BHP Billiton to focus on its minerals and petroleum assets, while giving BHP Steel the cash to fund its growth strategy. The listing was jointly managed by ABN AMRO and CSFB which pulled in their foreign contacts to place 34% of the shares overseas.

Locally, the deal attracted the type of institutional demand not seen since the sale of Telstra 2, ultimately generating A$1 billion worth of interest at the final price of A$2.80 per share. While this was at the lower end of the indicative price range of A$2.60 to A$3.30, the stock debuted at A$2.90 and climbed to A$3.00 soon after the issue.

The BHP Steel transaction was particularly noteworthy for its innovative matching action facility designed to deal with the company's dual-listing structure. The facility allowed for a compensatory adjustment to BHP Billiton plc shareholders who were not entitled to BHP Steel shares. This took the form of a bonus issue of BHP Billiton shares to existing stock owners.

ABN AMRO and CSFB achieved a good result for the Quiet Achiever in tough market conditions.


Best Secondary Offering

Westfield America Trust A$1.35 billion equity placement

UBS Warburg

One of the enduring themes in Australia's capital markets last year was the trend for local investors to gain access to offshore assets via ASX listed holding companies. And the company that forged the way was Westfield America Trust, a property trust built by complex corporate deal making that owns interests in dozens of malls across the US and is run by much respected chairman Frank Lowy.

In January last year Westfield announced that it was raising A$2.4 billion to acquire the assets of US mall operators Rodamco. While the eventuating deal didn't quite turn out how Lowy had envisaged it did elevate Westfield to the second-largest mall operator in the US behind Simon Property Group.

To fund this push, UBS Warburg was hired as sole lead manager to underwrite A$800 million of the trust's ordinary units and structure A$350 million in reset preference shares. The Swiss house generated more than A$2 billion in demand in under 18 hours, allowing it to upscale the deal to A$1.35 billion and scrap the reset preference issue. More than 130 institutions from 10 countries placed orders for the shares.

The bank also structured a A$150 million retail prospectus offer for existing unitholders and retail investors. The deal priced well at a discount of 7.2% to the distribution adjusted previous close, despite it equating to over 30% of the company's existing market cap.

By the end of the year the stock was trading at a 31% premium to the placement price, proving the company's star status with investors. With more acquisitions announced in January, this year will no doubt see another round of successful capital raisings from Westfield America Trust.


Best Equity-Linked Deal and Most Innovative Transaction

A$600 million floating IPO exchangeable reset securities (FLIERS)

UBS Warburg and Macquarie Bank

There's nothing new about reset securities in Australia. In the absence of an active convertible bond market, reset preference shares are the local answer to giving investors an equity kicker on fixed-income paper. But the reason that the floating IPO exchangeable reset securities deal that UBS Warburg and Macquarie Bank structured for the winning consortium on the Sydney Airports bid stands out is because it heralded a new era in bells and whistles, the coming of age of the instrument known as hybrids.

It successfully combined the technologies of reset securities, going-public convertibles and subordinated debt. Most importantly, the FLIERS transaction was structured so that the securities counted as Australian equity under the rules of the Airports Act, giving the Southern Cross consortium the ability to increase the size of its bid for the purchase of Sydney Airports from the government.

The raising of the additional A$600 million in equity proved a decisive advantage in the consortium's success. Institutional and retail investors alike lapped up the preference shares, which were priced to pay a quarterly dividend of three-month bank bills plus 400bps until the first reset date of 28 June 2007. After that there is a step-up in the dividend yield until the final maturity date of 28 June 2012.

If Southern Cross IPOs before the first reset date, investors can convert at a 5% discount to the institutional price. But the issuer also has a redemption option and can redeem the securities at 107% after five years.

To increase investor appeal, UBS Warburg and Macquarie Bank set up a number of credit enhancements including a guarantee from the airport lease-holding company and a separate dedicated coupon-servicing reserve. These characteristics also appealed to the ratings agencies, which rated the deal just one notch behind Southern Cross's senior debt. All in all the banks managed to pull off a highly-structured transaction that allowed the issuer to raise more than it could have in the traditional institutional sub debt market.


Best M&A Deal

Amcor's A$2.9 billion purchase of Schmalbach-Lubeca

Adviser to Amcor, UBS Warburg

The largest offshore acquisition by an Australian company in 2002 is also our best M&A deal of the year. Negotiated as a private treaty and on an exclusive basis, Amcor's A$2.9 billion purchase of the specialized packaging assets of Schmalbach-Lubeca met the company's strict EPS and return on funds employed criteria. The assets included manufacturing facilities for PET plastic containers and closures which are used in food and beverage packaging.

In the end it resulted in the company continuing its international growth strategy by becoming the third largest specialty packaging company in the world with annual sales of approximately $11 billion. Funding for the deal comprised of a $1.2 billion jumbo equity placement, A$823 million in debt financing, a A$210 million hybrid transaction and A$700 million from the sale of Kimberly-Clarke Australia.

UBS Warburg managed the open priced bookbuild process for the equity placement and sold more than 35% of the paper to offshore investors at a discount of only 3.6% to previous closing price. The Swiss house also underwrote the perpetual convertible reset securities that took advantage of Amcor's offshore tax base.

The debt portion of the deal was finalized later in the year with the help of JPMorgan, which arranged a $500 million Reg D private placement in the US. The bond transaction was tailored to meet Amcor's specific funding needs with 7, 10, 12 and 15-year bullet maturities and a six-month deferral for an extra $150 million.


Best Bond Deal

Wesfarmers A$250 million corporate bond

National Australia Bank and Westpac

Good things come in small packages and the A$250 million bond placement for Wesfarmers last year, though small, was a hit with investors. Wesfarmers, which wowed the markets in 2001 with its takeover of Howard Smith, is a solid conglomerate with interests in hardware, coal, gas, rural services, finance, insurance, chemicals and rail transport.

And in a bond market dominated by bank issuers, investors jump at the chance to participate in a corporate credit. Joint led by National Australia Bank and Westpac, the deal comprised A$100 million of three-year floating rate notes priced at 48 basis points above bank bill swaps, and A$150 million worth of five-year fixed rate notes at 60 basis points over bank bills.

The issue was Wesfarmers' debut in the bond market and was conducted under its A$1 billion debt issuance programme. Proceeds were used to refinance existing debt and for general corporate purposes. A total of 45 investors participated in the deal with 12% of the bonds sold offshore, predominantly to South East Asian investors. The bonds have performed well in the secondary market, despite adverse conditions, and at the end of last year were trading below their issuance level.


Best Securitization Deal

Leda CMBS refinancing

ANZ Investment Bank

The deal selected in this category can be looked at as an award that reflects well on the entire Australian securitization market. The Leda Group, a privately owned Australian property developer, came to market in November with the country's first refinancing of a commercial mortgage backed securitization (CMBS). The transaction, led by ANZ Investment Bank, is a landmark deal, indicating how well the asset class has performed since it was first seen in 1999 and paving the way for similar deals.

Fittingly, the deal being renewed - a A$215.2 million ($120.8 million) issue launched in December 1999 - was one of the first CMBS deals to hit the Aussie market, and the first by a private company. Leda is securitizing incomes generated by two retail properties: the Tuggeranong Hypodome in Canberra and the Morayfield Shopping Centre in Brisbane. The three-year transaction is split into four tranches.

Aside from the A$133.68 million triple-A rated senior tranche (A$117.95 million for the original deal), the three subordinated tranches benefit from upgrades by S&P since the original deal. Pricing on the triple-A notes is 45bp over the Bank Bill Swap Reference Rate (BBSW), three points wider than it was in 1999.

Despite the strong performance of the underlying pool, the pricing was more a consequence of the outward movement of spreads in the last few months. However, spreads actually came in for the three subordinated tranches on the Leda transaction.

The B notes priced at 65bp over BBSW compared to 75bp in 1999, while the C notes have tightened from 108bp three years ago to 95bp now. The D notes, on which pricing was undisclosed in 1999, offer a pick up of 150bp over BBSW.

The deal was fully subscribed at launch and placed into 11 accounts, all fund managers with no conduits. Four new buyers joined the seven investors who bought into the first deal.


Best Project Finance Deal

AMC's A$1.4 billion Stanwell Magnesium Project

ABN AMRO, ANZ Investment Bank, JPMorgan and WestLB

The privatisation of National Rail and FreightCorp in 2002 used project finance style instruments including carefully crafted syndicated senior secured debt and the unwinding of locomotive leases. But since our criteria for the best project finance award demands that the deal be related to the financing of a specific project, we happily honour the A$1.4 billion construction of the Stanwell Magnesium Project.

After nearly 10 years on the drawing board, Australian Magnesium Corporation will process 97,000 tonnes of magnesium metal each year at the plant located in Stanwell, central Queensland. The metal alloy produced at the plant will be used to manufacture lightweight automotive parts.

The project is of national significance and, as a result, received high levels of government funding from the Federal and Queensland state governments. The A$932 million senior bank debt facility underpinning the deal was arranged by ABN AMRO, ANZ Investment Bank, JPMorgan and WestLB.

The notes were structured to be flexible enough to fund possible capital cost overruns and delays in construction. The market risk of the project was mitigated by a 10-year off-take contract for 50% of the plant's output by the Ford Motor Company, which will also cover mot of the debt repayments. And funding institutions were further assured with a performance guarantee on project completion provided by Leighton Holdings, the parent company of the plant's constructors Leighton Contractors. Another outstanding feature of this deal was the calibre and diversity of the sub-underwriters which included BOS International, Mizuho Bank, China Construction Bank and HSBC.

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