Joint lead arrangers and underwriters UBS Warburg opened the retail portion of its hybrid deal for the owner of Sydney Airports yesterday (Monday) after closing the institutional book last week three times oversubscribed.
Close to one third of the A$600 million ($335 million) in floating IPO exchangeable reset securities (FLIERS) is being marketed to retail investors on the basis that they can gain preferential access to shares in the airport operator should the company go public.
The deal is part of the A$5.6 billion ($3.13billion) sale of Sydney Airports by the government to the Southern Cross Airport Corporation led by Macquarie Bank. Macquarie won the three-way bid for the privatization on June 25 and has since triggered a series of debt and equity deals to pay for the purchase.
UBS Warburg's innovative hybrid structure, which it pitched to Macquarie during the tender process, has allowed the syndicate to tap more offshore financing than it might otherwise have been able to.
John Needham, head of hybrid capital at UBS Warburg says: "The key constraint in the funding packages for all the bidders was the Airports Act requirement that majority ownership of the airport remain in Australian hands. Although sold largely to fixed income funds, the FLIERS are preference shares which qualify as 'Airports Act equity'." This classification will allow Southern Cross to tap more equity from offshore investors.
Hybrids of this nature have become hot property in Australia in recent months, particularly reset securities. UBS Warburg's own hybrid index has outperformed local equities this year, making it an attractive proposition to investors looking for yield in tough markets. Needham says institutional investors rapidly accepted the FLIERS structure and overcame the complexities of the instrument by comparing it to both traditional converting preference shares and subordinated debt.
"In creating the concept of the FLIERS, we drew on our previous experience with "going public" convertibles such as Korea Deposit Insurance Corporation, Australian reset preference shares and subordinated debt," says Vinod Vasan, associate director of Hybrid Capital at UBS Warburg. But the deal has its own list of firsts, including being the first reset security to be included in an infrastructure privatisation and the first reset security to include sub debt type protections which achieved high ratings from the agencies.
With a maturity date of 28 June 2012 and the first reset date of 28 June 2007, the preference shares will pay a quarterly dividend of three-month bank bills plus 400bp until the first reset date. After that there is a step-up in the dividend yield. 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.
The FLIERS received a BBB- rating from Standard and Poor's and a Baa3 rating from Moody's. In its comments on the deal, Standard and Poor's said: "Although the FLIERS are subordinated to current and future senior debt, the rating on them benefits from other credit enhancements, including a guarantee from the airport lease-holding company and a separate dedicated coupon-servicing reserve."