Communications infrastructure firm Arqiva has just sealed what will likely be the largest financing transaction in the UK’s s infrastructure space this year.
Its £3.7bn bond and loan refinancing was the result of more than two years of careful…
Communications infrastructure firm Arqiva has just sealed what will likely be the largest financing transaction in the UK’s s infrastructure space this year.
Its £3.7bn bond and loan refinancing was the result of more than two years of careful planning and negotiating. SatelliteFinance’s Jason Rainbow chats with CFO Phil Moses to gain his unique insights into the process.
Jason Rainbow: How important was the bond element to the refinancing?
Phil Moses: The whole refinancing was dependent on issuing £500m of senior sterling bonds at investment grade in order to get all the other debt lined up. In the end we issued £750m in notes because the demand was so strong.
JR: Did you also consider US$-dominated notes for your investment grade bond?
PM: No the senior investment grade bond was always going to be in sterling only. There are two tranches of that – there’s a £350m seven-year with a coupon of just over 4% and a £400m 20-year bond at just under 4.9%. But that was always going to be within the UK.
JR: So how long will you keep those US investors hungry?
PM: Well, we can’t do any more junior notes, £600m is it at the high yield level. The commitment that’s there is that there is that tranche of high yield and that’s it. But at the senior level we’ve got still £1.6bn of bank debt, which is split roughly 50/50 between three year and five year maturities. We have to take that out before year three and before year five, and we have to take that out with investment grade bonds.
I think our next one will be a senior dollar bond and I think it will be pretty quick.
JR: What are the drivers behind this demand for your bonds?
PM: I think bonds are the new equity – it’s where people want to put their money. Pension funds have got to invest in bonds, because they provide a similar return for the liabilities that they’ve got. So their liabilities are long term and their return needs to be long term – and secure, they can’t have the vagaries of the equity market. So there’s a huge demand for bonds and that’s what we’re tapping into.
JR: Where else would you consider holding roadshows for these bonds?
PM: We will probably do a euro investment grade bond at some point, and also possibly a Canadian investment grade bond because, at the end of the day, you’ve got to tap different markets to get the scale of demand that we need. And the reason for Canadian is because our big shareholder is the Canada Pension Plan Investment Board. We have therefore good contacts with Canadian banks, pension funds, etc, so it makes sense to go to that market.
JR: So in total you had about 20 banks working on these notes?
PM: We were keen to have a bigger club as possible. We set out with 20 banks all lending us on average just under £100m. But they’ve also got to take counter party risk, as well as risk on swaps, and provide some currency hedging for when I do issue bonds in dollars, euros, etc.
So they’ve all got to put some balance sheet in, and to be honest the more you have then the less each one has to put in. They’re all quite happy to share the fees because they share the risk. We didn’t think we could carry 20 banks through – we thought some of them would drop out because they wouldn’t be able to find the balance sheet, they’d not be able to take the credit swaps, counterparty risk, and it’d be something they wouldn’t have been able to get past their committees. But in the end only one dropped out.
JR: Who were your main financial advisers on this?
PM: Rothschild was the main refinancing adviser – they have been for the last two years – and they’ve done a good job. HSBC was the ratings adviser. We’ve never had a rating before because we were financed entirely by bank debt up until this point. And the reason to do this big refinancing was because that bank debt was lent to us in 2007 and repayable in 2014.
So we had to go to the market now and do all this refinancing and get a rating, because you don’t really want to leave it to the last year. If you do then it moves into creditors below one year on your balance sheet, and then you’ve got auditors asking going concern questions, etc.
It was also the ideal time to do it because it was very cheap debt, which you want to run as long as possible. You want to go to the market at the best time for the market – and January/February is good because everyone has got a clean book and really wants to invest.
What also turned out in our favour was the market was really hot. The stars came into alignment for us. And we earned it. I mean, we worked for two years on delivering this so we’ve earned that little bit of luck.
If the high yield market wasn’t open we probably would have had to get some other form of lending on the high yield so we could still go with the refinancing. But because it was open we’ve taken the whole £600m there and that’s our high yield done for several years.
JR: How important is Arqiva’s investment grade rating to the company – seeing as being an infrastructure company it is a pretty safe bet?
PM: Because it’s a safe bet you can generally borrow money cheaper at investment grade, but you go down that route for two reasons. One is we deemed that our average rate, for the senior investment grade plus the high yield, would be lower that route than if we went entirely high yield.
The other one is, when you’re pitching for big government contracts – and we’re pitching for the UK’s smart metering business, which will see every home in the country have a meter and a hub – you have to have a strong balance sheet. And therefore being investment grade enables you to be in the game to pitch for such business.
JR: Was the equity injection that Arqiva received key to that investment grade rating?
PM: Yes, and we always knew we’d have to put in some equity injection. In fact, when we set the targets a couple of years ago, £400m was roughly the number we were aiming at. We knew our aim was to get something like 7x leverage. And, because we knew what we had was more than 7x, it was clear shareholders would have to put out one turn of leverage. And in fact they knew this way back in 2009 because the shareholders stopped taking any distributions – either the interest on loans or dividends – since then, because they knew they’d have to deleverage.
No one lends you what you could borrow in 2007 before Lehman Brothers collapsed any more. You could almost borrow any amount of money before Lehman collapsed. We had 10x leverage, and we’re now down to 7x.
JR: And how hard was the bank debt part of this refinancing?
PM: Well it was all part of it. We couldn’t, for instance, raise £3bn of senior bonds in one day. The bank debt is only temporary financing until we issue the bonds. We’re not expecting to be bank debt funded forever – that’s why it’s three and five years. And the whole idea was it forced the company to keep issuing the bonds to get that £1.6bn moved from being bank debt to bonds.
JR: So what is their level of subordination within the whole package?
PM: The bank debt sits in a separate company, but in theory it and the bonds are all pari passu. The simple reason for one part being outside the company is, to get the rating, the ratings agencies didn’t want a concentration of maturities. If you put the three and the five year debt into the whole business securitisation the ratings agencies can’t rate it.
So you stick it on the side and turn it out with bonds. And as you issue the bonds they come inside the whole business securitisation. At the end of this, when all of that debt is inside the business securitisation, the financing company that sits outside will not be needed.
JR: Tell me about your foreign operations.
PM: We’re mostly UK-based, the only operations we have outside are mainly satellite. We’ve got a French business and a US business – although we’ve closed the teleports in both of those countries. But we still have the business – we haul the stuff back on fibre to the UK and then we send it up from the UK teleports.
We closed teleports in Washington, LA and Paris as we don’t need any of those.
JR: Have you ever had any plans to repeat your business in the UK elsewhere?
PM: People talk about it, but I’m not sure it’s for us at this stage. I mean, there aren’t many synergies to running a tower business in Spain and running one in the UK. You might save CEO, CFO – a bit of management – but that’s it really. We’re very much looking to leverage the assets we’ve got. So smart metering is perfect. We’ve got towers, we’ve got some spectrum, put the two together and we can offer the services. We might have to build a few more towers, but in general we have the infrastructure to offer something different to what everybody else is offering on the back of assets we already own.
And we like that model. So anything that we can put on towers, where they’re already there, just means we’re getting a much better return for our shareholders. Finding those opportunities isn’t so straight forward. But, that’s our job.
Our other big play at the moment is Wi-Fi, and another advantage we have is we’re not a consumer brand. We don’t compete with UK mobile operators Vodafone, EE and Hutchison 3G. What we’re offering them is a Wi-Fi wholesale network.
JR: So are the infrastructure joint ventures mobile operators have been forming helping that business?
PM: Longer term I think with the consolidation that has sort of happened – there’s currently two camps, EE/3 and O2/Vodaf, – there’ll be only two networks. You could even envisage, in the really long term, that there will only be one network once differentiation is no longer an issue.
But today there’s a rush to roll out 4G. Someone will have a better 4G network and someone will have one that is less good. So I imagine they’ll want to keep that differential between the networks for the time being.
JR: Could Arqiva be a buyer if they end up selling parts of their infrastructure?
PM: It’s possible. We’d have to finance it, and we’ve just refinanced ourselves with 7x debt. But I think, in the longer term, could Arqiva be part of a consolidation of towers? Absolutely yes. To be honest I think they would prefer to run two separate networks for now, and then I think in maybe 5, 6, 7 years time that might be when that consolidation happens.
JR: What do you think of what has been happening in Europe – with two non-European towercos snapping up assets over there?
PM: People approached us about that. But I’m not sure going outside the UK brings any synergies for us. American Tower has a slightly different model – they’re buying towers in any country. And US tower companies are so highly valued that they can buy the towers and make it up to 12x EBITDA but get a multiple of 17x EBITDA on their business. So it makes some sense for them.
European tower companies are cheaper than American tower companies. So I think it makes sense for American Tower to buy assets in Europe – I’m not sure it makes sense the other way around.
So probably not for us at this stage, I think our job is to leverage the assets we’ve got and earn a better investment return on those. Buying another tower company doesn’t necessarily give you anything.
And in the UK I’d rather win the business from another tower company and get it onto our existing towers – why would I buy more towers, we’ve got plenty of them?
JR: What about Arqiva being an acquisition target itself from someone like American Tower?
PM: It’s possible. I mean, it’s quite big. Our enterprise value is between £5bn and £6bn.
But I have no plans to IPO or anything – we’re a private company owned by five major shareholders, and they’re in it because they’ve got pension funds and those want the earnings stream, and they want the growth of the asset. They’re long-term infrastructure funds and if they sold Arqiva they’d only have to buy something else.
