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Capital Markets Case Study 20 March 2008 Eugene Belin Managing Director, Head of FICC, Citi Russia, CIS and Israel.

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Presentation on theme: "Capital Markets Case Study 20 March 2008 Eugene Belin Managing Director, Head of FICC, Citi Russia, CIS and Israel."— Presentation transcript:

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2 Capital Markets Case Study 20 March 2008 Eugene Belin Managing Director, Head of FICC, Citi Russia, CIS and Israel

3 Who are we?

4 What We Do Issuers / Borrowers Corporations Governments/ Sovereigns Corporate & Investment Bank Branded Consumer and Retail Energy + Power Forest Products + Chemicals Industrials + Capital Goods Real Estate Telecom + Media Capital Markets Sales + Trading Investors Banks Hedge Funds Insurance Companies Mutual Funds Pension Funds Individual (Retail) Money Market Funds Relationship Bankers with an Industry Focus MONEY ¥ $ £ € Healthcare + Pharmaceuticals Financial Sponsors Financial Institutions ¥ $ £ € Bankers with a Market / Product Focus Primary + Secondary Market Activity Banks

5 Capital Raising Options Fixed IncomeEquities Commercial Paper LoansBondsEquity Linked Equity Derivatives Low Risk High Risk Capital Markets

6 KPN: Interactive Case Study

7 Introduction to KPN oKoninklijke (Royal) KPN NV (“KPN”) is a Dutch telecoms company, formerly the Dutch state-owned monopoly o Core activities include: –Fixed-line services in the Netherlands –Mobile services in the Netherlands, Germany and Belgium oKPN is listed on the Amsterdam, New York, London and Frankfurt stock exchanges oKPN has had an eventful history –Privatisation –Deregulation –Purchase of 3G licences –Rating downgrade 7

8 May 2000 oKPN’s objectives: –Refinance “bridge facility” arranged for the acquisition of German mobile operator E-plus –Secure medium-term financing for upcoming 3G auctions  Markets hard hit after “bubble” bursts - investors nervous  Deluge of telecom supply expected after licence auctions  Markets hard hit after “bubble” bursts - investors nervous  Deluge of telecom supply expected after licence auctions Bonds  Positive credit sentiment due to boom time  Increased “liquidity” levels in the market  High M&A activity (and hence acquisition financings) meant increased loan volumes  Positive credit sentiment due to boom time  Increased “liquidity” levels in the market  High M&A activity (and hence acquisition financings) meant increased loan volumes Loans  Investor uncertainty following market decline from March 2000 highs.  Strong telecom equity pipeline  Investor uncertainty following market decline from March 2000 highs.  Strong telecom equity pipeline Equity  Share Price: €47-60  Bond Price: €89-91  Credit Ratings: Aa2/AA  Loan Price: Libor bps  Share Price: €47-60  Bond Price: €89-91  Credit Ratings: Aa2/AA  Loan Price: Libor bps KPN Market data:

9 KPN Trading History Share Price and Bond Price Performance – Jan 99 to May 00

10 ?

11 BONDS

12 Result? Key Features / Terms Offer Size KPN NV €6.0bn equivalent Multi-tranche Eurobond 1, 2 and 3 years 3 day European roadshow All “pot” 140 Joint Bookrunner Market Maturities Bookbuild No. investors $1bn FRN due Jun 01 €1bn FRN due Jun 01 €2.5bn FRN due Jun 02 €1.5bn 5.575% due Jun 03 Press Comments Citi Role Marketing Issuer oThe Company announced a jumbo multi-tranche short-dated Eurobond financing through Citi:  “KPN eases telecom fears in short-dated €6bn raid” Euroweek  “That’s the way to do it……KPN last week answered the big question – whether telecoms borrowers can access the fixed-income sector – with a resounding YES.” IFR  “KPN eases telecom fears in short-dated €6bn raid” Euroweek  “That’s the way to do it……KPN last week answered the big question – whether telecoms borrowers can access the fixed-income sector – with a resounding YES.” IFR

13 July 2000 oKPN’s objectives: –Reduction of debt level having secured financing ahead of 3G auctions  Corporate bond supply increases, requiring issuers to pay higher and higher yield  Govt. spreads widen as USTs outperform  Corporate bond supply increases, requiring issuers to pay higher and higher yield  Govt. spreads widen as USTs outperform Bonds  Continued high liquidity in the market and positive credit sentiment due to boom time Loans  Continued decline from March 2000 highs, however appetite for telecom equity still exists as investors hope for recovery Equity  Share Price: €38-44  Bond Price: €89-90  Credit Ratings: A3/A-  Loan Price: Libor bps  Share Price: €38-44  Bond Price: €89-90  Credit Ratings: A3/A-  Loan Price: Libor bps KPN Market data: 11

14 KPN Trading History Share Price and Bond Price Performance – Jan 99 to Jul 00

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16 EQUITY

17 Result? oAnnouncement on 17 th July 2000 that the Company would launch a “substantial” equity offering in Q o€5.5bn combined equity and equity-linked offering launched via Citi on 16 th October 2000 EquityEquity-Linked Offer Size €4.0bn€1.5bn Fully marketed Equity Offering“Subordinated” “Convertible” Bond €17 following bookbuild (2.4% discount to market) 5 year maturity, 3.5% coupon, 26% conversion premium 1.8x11.3x Joint Global Co-ordinator and Bookrunner Offer Type Pricing Oversubscription Citi Role

18 September 2001 oKPN’s objectives: –Obtain short term financing  In secondary market investors rebalance portfolios away from volatile equities and towards cheap bonds  But in primary market the high yields are unattractive to issuers  In secondary market investors rebalance portfolios away from volatile equities and towards cheap bonds  But in primary market the high yields are unattractive to issuers Bonds  Slowdown in economy raises credit concerns  Lower loan volumes compared to 2000  Low appetite for telecom names  Slowdown in economy raises credit concerns  Lower loan volumes compared to 2000  Low appetite for telecom names Loans  Share price at historic lows. Sentiment weak towards telecom stocks.  Uncertainty over timing of economic recovery  Share price at historic lows. Sentiment weak towards telecom stocks.  Uncertainty over timing of economic recovery Equity  Share Price: €3  Bond Price: €71-72  Credit Ratings: Baa2/BBB+  Loan Price: Libor+200bps  Share Price: €3  Bond Price: €71-72  Credit Ratings: Baa2/BBB+  Loan Price: Libor+200bps KPN Market data:

19 KPN Trading History Share Price and Bond Price Performance – Jan 99 to Sep 01

20 ?

21 LOAN

22 Result? oSeptember 2001: €2.5 bn underwritten liquidity facility provided by Citi together with 7 banks oFacility had higher pricing and tighter credit protections Key Results Tightened from over 1000 bps to approximately 400 bps. Current spreads are 50 bps Up by 20% in one day and 65% since its lowest value in 2002 Upgrade with stable outlook to BBB+/Baa1 Tighter credit protection and higher pricing Bond Spreads Stock Price Ratings Terms & Conditions

23 November 2001 oKPN’s objectives: –Debt reduction –Avoidance of “fire-sale” of assets –Funding growth  Corporate market rebounded after Sep 11 activity.  Volatile equity market drives investors towards fixed income.  Corporate market rebounded after Sep 11 activity.  Volatile equity market drives investors towards fixed income. Bonds  Slowdown in economy raised credit concerns  Lower loan volumes compared to 2000  Low appetite for telecom names  Slowdown in economy raised credit concerns  Lower loan volumes compared to 2000  Low appetite for telecom names Loans  Volatile markets due to uncertainty on economic recovery  Interest rate driven market  Defensive nature of fixed line telecom stocks attractive  Volatile markets due to uncertainty on economic recovery  Interest rate driven market  Defensive nature of fixed line telecom stocks attractive Equity  Share Price: €4-6  Bond Price: €72-85  Credit Ratings: Baa2/BBB-  Loan Price: Libor+200bps  Share Price: €4-6  Bond Price: €72-85  Credit Ratings: Baa2/BBB-  Loan Price: Libor+200bps KPN Market data:

24 KPN Trading History Share Price and Bond Price Performance – Jan 99 to Nov 01

25 ?

26 EQUITY

27 Result? oKPN announced a €5.0bn equity offering on 21 st November 2001 via Citi. Offering Summary Offer Size €5.0bn Fully marketed Equity Offering Existing shareholders given preferential allocation Fully underwritten €4.90 – 18.6% discount to pre-announcement price 44% 22 nd November to 6 th December 75% Joint Lead Manager Offer Type Pricing % of Enlarged Co Bookbuilding Period Take up by Existing Shareholders Citi Role

28 18 September 2003 Stock Price Performance Performance Since 12-Mar KPN:21% Sector:30% Market:36% KPN price on 18-Sep: €6.75 KPN Objectives Remove overhang Minimum impact on share price Quick, efficient process Remove overhang Minimum impact on share price Quick, efficient process Competitive auction of a block of shares (“Block trade”) Government Objectives Raise finance from non-core stakes Achieve maximum price for them Quick, efficient process Raise finance from non-core stakes Achieve maximum price for them Quick, efficient process ITS 5:30PM ON THAT THURSDAY, YOU GET THE CALL...

29 Block-Trade Exercise Student Hand-out

30 Parameters of the Auction Number of shares being sold 300 million Reference price per share Indicative auction value €6.75€2,025 million Split into teams of 5/6 Teams will bid against each other to win the auction Split into teams of 5/6 Teams will bid against each other to win the auction Process Teams 15 minutes for your team to decide what price to bid Submit price in € per share in sealed envelope 15 minutes for your team to decide what price to bid Submit price in € per share in sealed envelope Deliberation Goal is to win the auction, but not lose money!!! Explanation of factors to consider Views from key decision-makers in the process Explanation of factors to consider Views from key decision-makers in the process Considerations Whichever team bids the highest price per share will win But, what price were the shares sold to investors at on Friday? Cash prize if a team can win the auction at a price that the shares can be sold at Whichever team bids the highest price per share will win But, what price were the shares sold to investors at on Friday? Cash prize if a team can win the auction at a price that the shares can be sold at Winner! (or are they?)

31 Risk – Reward Considerations oKey measure to consider in deciding what price to bid at is the percentage discount to the reference price (left hand column of table) oThe amount of money the firm makes will depend on what price the shares are sold at the next day (matrix table) Bid Prices Profit & Loss

32 Share Price Performance oKPN’s share price has increased c.20% since March oBut, it has underperformed the sector by c.15% for most of the year. One concern of investors has been the overhang, i.e. the potential impact on the share price of the Dutch State selling their 31% shareholding in KPN oThis auction of 40% of the Dutch State’s shareholding, will reduce these concerns and is likely to have a positive impact on the share price

33 General Block Trade Information -4.1% -3.6% -2.9% -6.1% -4.2% -5.0% -7.0% -2.8% -5.0% -4.4% -1.6% -8% -7% -6% -5% -4% -3% -2% -1% 0% Q1 01Q2 01Q3 01Q4 01Q1 02Q2 02Q3 02Q4 02Q1 03Q2 03Q3 03 Discount to Pre-Announcement Average: -4.3% oBlock trades are typically executed at a discount of between 0% and 10%, but this is not a rule oRecently, as block issuance has increased, banks have become more competitive –Tighter discount needed to win a bid oAn important consideration for pricing is the average daily trading volume (ADTV) multiple – the number of normal days’ trading volume represented –If a stock has an average of 1m shares traded per day, a 5m share block would have a multiple of 5x oLarge block relative to ADTV implies big market impact – larger discount oAt 26x ADTV multiple, KPN block is larger than average

34 Precedent Auctions Approx. Size €2.0bn / $2.3bn Multiple of Average Daily Traded Volume 26x Vodafone$5.1bn1.6%2.5x 5.6% Yes Vivendi Universal$2.9bn6.5%12.5x5.3% No Vodafone$1.2bn0.6%1.1x1.5%Yes Diageo$1.1bn3.9%8.3x7.8%Yes Telenor$1.0bn13.9%88.1x6.1%Neutral Percentage of KPN 12.0% CompanySizeDiscount Multiple of Daily Volume Did the Bank Make Money? % of Company

35 View of Independent Equity Research Analysts Research HouseRecommendation 12 month Target Price Views “KPN offers investors a well-run company that is undervalued. In our view, there are few barriers to [share price] outperformance in the short term” Buy€7.40 “We see KPN as having a strong management team, good earnings momentum, a sound financial position and a very attractive valuation” Buy€8.00Bank “M” “Results once again ahead of expectations. However, concerns about domestic competition and issues with German operations. Following recent recovery in share price, we downgrade our rating to neutral” Neutral€7.10Bank “C” “We have fundamental concerns about KPN for three reasons; we believe the quality of the assets is below that of the peer group, KPN faces above average broadband competition, cash flow is worse than the sector” Sell€5.00Bank “D” 75% of research analysts have a “Buy” rating on the shares

36 Advice From the Citi Team Sales / Research “This is a great stock which we have been recommending our clients to buy” “The share price has underperformed its peers in part due to the worry about this placing. We think the shares will rise after this transaction” “This is a great stock which we have been recommending our clients to buy” “The share price has underperformed its peers in part due to the worry about this placing. We think the shares will rise after this transaction” Equity Capital Markets “We want to win this deal. It is a very prestigious transaction” “Winning is very important to our franchise, league table position and budget” “It is going to be a very competitive process and we need to bid aggressively” “We want to win this deal. It is a very prestigious transaction” “Winning is very important to our franchise, league table position and budget” “It is going to be a very competitive process and we need to bid aggressively” Senior Management “OK, this is a big deal and we want to win” “However, it is only one deal and should not bet the firm on it” “We should bid to win, but also not to lose money” “OK, this is a big deal and we want to win” “However, it is only one deal and should not bet the firm on it” “We should bid to win, but also not to lose money” Trading “We are the #1 trader of the shares, we know it very well. There are a number of fund managers that want to buy a lot more stock” “Demand at the right price will not be a problem” “We are the #1 trader of the shares, we know it very well. There are a number of fund managers that want to buy a lot more stock” “Demand at the right price will not be a problem”

37 What to Do Next oThe clock is ticking minutes to decide on a price in € per share to bid oWrite team name and the price per share on a piece of paper and then hand in oOnly a team which wins the auction and does not lose the firm money will get the cash prize! Good luck...

38 The Next Day...

39 What Happened Next... Citi briefs salesforce Order book opens Citi briefs salesforce Order book opens 07:00 Demand received for half the deal 07:30 Demand equals deal size Shares at €6.83 Demand equals deal size Shares at € :15 Transaction closed, demand for €2.6bn 09:30 Transaction priced at € :45

40 Independent Views on the Transaction “The deal provides a shot of confidence for European telecoms investors who have sat beneath government share overhangs for years. It demonstrates that a strong appetite remains for telecoms shares” Lex, Financial Times, 19 September 2003 “The deal has finally come after months of rumours, but the manner in which it arrived still took the market by surprise” International Financing Review, 20 September 2003 “The block trade, arranged by Citi, will reduce the threat of an overhang that has depressed KPN's share price in recent weeks” Financial Times, 20 September 2003 “The offering was extremely well executed by Citi” Financial News, 29 September 2003 “Rivals described it as the most aggressive deal they had ever seen” Financial News, 29 September 2003 “If European ECM bankers needed any further indication that sizeable deals are possible in today’s markets, given good knowledge of the stock and confidence in one’s own distribution ability, they needed to look no further than the ground-breaking display from Citi on Friday morning” International Financing Review, 20 September 2003 Independent press reports acknowledged the resounding success of the transaction

41 QUESTIONS


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