Dyno Nobel prices $258 million hybrid

The step-up preference securities will pay 180-day swap plus a margin of 200bp.
Industrial explosives company Dyno Nobel has priced a A$300 million ($258 million) hybrid transaction at the tight end of guidance, attracting interest from 25 institutional accounts. The fund raising is the companyÆs first significant foray into the capital markets since its listing on the Australian Stock Exchange in April 2006.

The step-up preference securities will pay a semi-annual coupon of the 180-day bank bill swap rate (BBSW) plus a margin of 200bp. The margin was set yesterday during a one-day bookbuild process conducted by lead manager Macquarie Equity Capital Markets, and was at the tight end of an indicated range of 190bp and 230bp given on Monday. The deal is being co-led by Credit Suisse.

Dyno Nobel, which is a supplier of industrial explosives and blasting services to the mining, quarrying, seismic and construction industries, was able to upsize the deal from an initial target of A$250 million. ôAll but two or three accounts that participated in the marketingö bought in, says a source, who adds that all orders were scaled back. The notes were bought by a combination of hybrid funds and retail brokers with the deal split 60/40 between institutional and retail accounts. A small portion of notes will now be sold to priority shareholders, with this part of the offer due to close on July 26.

ôThere was a surprising level of retail demand particularly given that the distributions are unfranked,ö says the source. ôYou would usually expect unfranked notes to be less popular with retailers but I think Dyno Nobel appeals to individual investors because the IPO is still fresh in their minds and there is a lot of interest in the mining sector in general.ö

The pricing puts the deal on a par with other hybrids issued by paper merchant PaperlinX which priced its deal at 230bp over BBSW in March this year, and agricultural supplier Nufarm which priced at 190bp over BBSW in November last year.

Dyno Nobel is the next significant Aussie company to tap the hybrid market in a new wave of deals that have similar characteristics. Hybrids have been popular in Australia for over a decade, but the early transactions were often treated more like debt than equity by the ratings agencies which meant they affected an issuerÆs credit rating and soon attracted a reputation as being an expensive form of debt. They also carried clever acronyms like the FLIERS deal for Sydney Airports and the CARS deal for TransurbanÆs M7 tollway.

The new hybrids are plainly called step-up preference securities, but more importantly, they feature tighter replacement language which gives note-holders comfort that the securities will continue to be re-issued. Such replacement language means that the agencies can apply sufficient equity credit to the transactions so that an issuerÆs overall credit standing is not affected.

Dyno NobelÆs securities are perpetual notes sold at a face value of A$100. Investors receive unfranked, semi-annual, floating rate distributions that are discretionary and non-cumulative, which means if the company encounters financial difficulties it doesnÆt need to pay distributions. The notes carry reset dates allowing the issuer to seek more favourable terms by remarketing the offer. If the notes are not remarketed, or Dyno Nobel chooses not to repurchase or exchange them, then investors receive a step-up of 2.25%. The first reset date is scheduled for June 30, 2010.

The terms also carry a provision that will see investors receive 115% of the face value of each note in the event that the company is acquired or there is a change of control.

Dyno Nobel launched its transaction last week and conducted a three-day institutional and broker roadshow. The company will use the proceeds to repay some of its debt and strengthen its balance sheet capacity.

Ironically, the new wave of hybrid issuance was kicked off by Orica in February 2006 when it issued A$500 million worth of step-up preference securities at 135 basis points over BBSW. Orica used the proceeds of the transaction to partly fund its $1.7 billion acquisition of Dyno Nobel which it had orchestrated in partnership with Macquarie Bank in order to get around US anti-trust laws. Orica assumed control of Dyno NobelÆs Latin American, European, African and Asian businesses and then Macquarie Bank bundled up the remaining assets and listed Dyno Nobel on the stock exchange.

OricaÆs step-up priced at an effective rate of 6.98%, making it only marginally more expensive than the circa 6.25% that similar BBB+ rated corporates were paying for senior debt in the bond markets at the time. The deal was also upsized from A$400 million due to strong demand, mainly from retail investors.

A source close to the Dyno Nobel transaction says the Orica step-up was not used as a comparison during the marketing process. ôOther than operating in the same sector, the two companies are very different,ö says the source. ôOrica is larger, more diverse and it is rated.ö

Dyno Nobel is as yet unrated by the ratings agencies, though it says it follows a policy of building an investment grade credit profile. Being unrated allowed the company to schedule the first reset date in three years instead of the five-year maturity offered on other deals for rated companies like Orica and Fairfax. The new equity-friendly ratings agency treatment for hybrids insists upon a five-year term before the first reset.

ôThe company has agreed that if it seeks a credit rating prior to June 2010 it can bring forward the reset date and re-issue the notes with an extended maturity so that they qualify for equity treatment,ö says a source.

Since Dyno Nobel floated in April 2006 it has delivered full-year 2006 earnings that were 10% above the IPO prospectus forecasts. Much of this revenue was generated in North America, the companyÆs biggest market, where it integrated 10 acquisitions during the course of last year. Dyno Nobel is now the market leader in North America where it generates a full 85% of its earnings. Its second largest market is Australia where the company has commenced construction of an ammonium nitrate plant that will produce 330,000 tonnes of the oxidising agent annually.

More recently, the company has made strategic acquisitions in Asia, tying up with Fabchem in China and TKEB in Malaysia.

In the 2006 calendar year, Dyno Nobel made A$1.24 billion in revenue and Ebitda of A$176 million. In the same period, its net debt stood at A$527 million giving it a net-debt-to-net-debt-plus-equity ratio of 50.3% and a net-debt-to-Ebitda ratio of 2.4x which is below its targeted range of 2.75x to 3.00x. That compares to 4.0x for PaperlinX, 2.3x for Fairfax and 1.3x for Orica. Dyno Nobel says it is on track to meet 2007 earnings targets.

Dyno Nobel expects its financial ratios to improve when the Australian ammonium nitrate plant comes on stream in about three years from now.
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