IAFEI Quarterly€¦ · Syndicated Revolving Loan Facility due 2014 5 Fundingthroughthe...

August 17, 2011, www.iafei.org Copyright © iafei 2011. All Rights Reserved

SPECIAL ISSUE TREASURY, PART 3

IAFEI Quarterly Special Issue Treasury

The electronic professional journal of IAFEI(International Association of Financial Executives Institutes)

Special Issue August 2011

IAFEI Quarterly, Special Issue, Treasury August 17, 2011 Table of Contents Letter of the Editor

Part 1

AkzoNobel, Presentation: Building a centralized treasury function by Gerrit Willem Gramser

Part 2 Deutsche Post DHL, Presentation: Risk as key driver towards treasury centralisation by Daniel Robrechts

Ladbrokes PLC, Presentation: Case Study by Vinot Parmar Part 3 Merck, Presentation: Funding through the loan and bond market – the corporate experience by Rando Bruns Standard & Poor´s, Presentation: Economic Outlook and Corporate Ratings Review by Chris Dinwoodie

Letter of the Editor

Dear F inancia l Executive,

You receive the IAFEI Quarterly, Special Issue, Treasury.

August 17, 2011

This is another issue of the electronic professional journal ofIAFEI, the InternationalAssociation of Financial Executives Institutes. This journal, other than the IAFEIWebsite, is the internal ongoing information tool of our association, destined to reachthe desk of each financial executive , or reach him, her otherwise, at the discretion ofthe national IAFEI member institutes.

The corporate treasury function has been, and is being, directly and immediatelyimpacted by the ongoing worldwide financial crisis with its many diverse facets.

This present Special Issue Treasury provides you with a number of case studies ofsuccessful specific core activities of corporate treasury operations. The case studiesare from famous corporations from several countries. Some of these corporations arerepresented through membership in IAFEI member institutes .

All case studies are self explanatory and reflect the high state of professional art incorporate treasury functions in the business world.

All case studies have been presented at the ACT Annual Conference , May 10 - 11,2011, in Liverpool, United Kingdom, organised by ACT, the Association ofCorporate Treasurers, United Kingdom. To this association, several IAFEImember institutes maintain good relationships, and through these IAFEI has gotaccess to these case studies.

IAFEI is thankful for having received permission from the Association ofCorporate Treasurers as well as from all individual corporate presenters ofcasestudies, to include these case studies ill the original form ill this

Special Issue Treasury.

Once again, I repeat our ongoing invitation to IAFEI member institutes, and to theirmembers , to send us articles for inclusion in future IAFEI Quarterlies, and to alsosend to us your suggestions for improvements.

This IAFEI Quarterly, like its predecessors, offers a variety of subjects . Enjoyreading them.

With best personal regards

Helmut Schnabel

•••MERCK••

Funding through the loan and bond market the corporate experience

Rando Bruns

Head of Treasury, Merck KGaA

10 May 2011 , ACC Liverpool , UK

Merck at a glance

Contents

•II Ir-T-h-e- lo-a-n-m- a-rk-e-t- - - - - - - - - - - - --,

. , The bond market

. , FX management

. 1Timeline and result

_ ILessons learnt

2 Fundingthrough the loan and bond market 110 May 2011

II I

'.MERCK•I

I

•' .MERCKI

I

Merck at a glanceCompany overview

• Oldest pharma and chemicals company in the world - since 1668; no link to Merck & Co. in USA

• Diversification in pharma, life science , and chemicals to spread risk

• Focus on specialty & niche markets

• -70% family ownership; -30% public ownership by shares

• Consistently profitable

• Major acquisitions: Serono (CH) in 2007 (CHF 16.6 bn) and Millipore (US) in 2010 (USD 7.2 bn)

Pharmaceuticals (Sales 2010: EUR 6.2 bn),

Chemicals (Sales 2010: EUR 3.1 bn)

Merck Serono Consumer Health Care Merck Millipore Performance MaterialsI

Leading market positions• Liquid Crystals

• Pearlescent Effect Pigments

\I

Leading market positions

• Life Science tools

--..I~

(emibion800 .., ",0.. ...

- .f41ebif GONAL-afdtrIrrJIArrllJ ....__,. .·.sc·...

ERBITUX :CETUXIMAB~

Leading market positions

• Multiple Sclerosis

• Fertility

• Cancer Treatment

3 Funding through the loan and bond market 110 May 2011

II

' ,MERCKI

I

Merck at a glanceRegional diversification

Sales by Region (FY 2010) EURm3,747

Asia/AfricaAustralasia+36%

2,572

Europe+ 11%

• Phannaceuticals

• Chemicals

Latin America+15%

North America+31%

1,530

• Broad global presence with more than 40,000 employees

• Merck operates in 67 countries worldwide

4 Fundingthrough the loan and bond market I 10 May 2011

II

' .MERCK" •

Merck at a glanceFinancial set up

• Important pillars of Merck's financia l policy are:

- Financial flexibility through diversification of funding sources

- Syn loan is Merck's strategic reserve and defines the group of relationship banks

- Solid investment grade rating at all times

Major Funding Sources

Cash I Marketable Securities

Debt Issuance Program

ECP-Program

Syndicated Revolving Loan Facility due 2014


Frame

EUR 10,000m

EUR2,000m

EUR2,000m

Utilization (31. March 11)

EUR 1,540m

EUR4,180m

EUROm

EUROm

Comment

Plus EUR 500m standalone

not often used

pure back-up line

The loan market

Contents

_ , Merck at a glance

•B lr-T-h-e- bond- m- a- r-k-e-t - - - - - - - - - - - ------,

. , FX management

. , Timeline and result

. , Lessons learnt


I

.'' .MERCKII

I

II

' .MERCK" •

The loan marketPreparation of acquisition financing Millipore

• In order to be prepared for a potential acquisition Merck met in 2009 with majorrelationship banks in order to get a feeling for their lending capacity, market expertiseand personal expertise.

• Merck was invited to a selective auction process by Millipore Corp early 2010.

• Development of Merger Model together with M&A advisor

• Development of funding concept

- Mixture of cash, loans and bonds

- Search for group of arrangers

7 Fundingthrough the loan and bond market I 10 May 2011

The loan marketLoan negotiations

• Draft Bridge Loan Agreement was developed by Merck

• The following banks were mandated :

II)

' .MERCKI

I

Banko' America~Merrill lynch

*:~""'- :l\n~ P I\IU B I\S

bnp~:anb~$ ..eomCOMMERZBANK

• The same set-up of external counsels was chosen as during the last two major loannegotiations of Merck

• Merck commun icated clearly some criteria as potentia l deal breaker with banks

B Funding through the loan and bond market I 10 May 201 1

The loan marketMajor challenges during loan negotiations

• No benchmark transaction available

• Determination of Bridge Loan amount

• Risk aversion of banks, even for short time frames


I ,' ,MERCK,

I

The loan marketSyndication

• Quick refinancing via the bond market was envisioned in order to use marketopportunities and reduce fees

• Participation of banks in the bond issuance was linked to the participation in thesyndication

• After the bond issues the bridge loan was reduced substantially and syndicatedimmediately thereafter

• Merck drove successfully the syndication process

10 Funding through the loan and bond market I 10 May 2011

I II

' .MERCKI I

The bond market,

Contents

8 'Merck at a glance

. 1The loan market

•. 1FX management

. , Timeline and result

. , Lessons learnt


I II

'.MERCKII

I

I ,.' .MERCK

II

The bond marketEUR 3.2 bn bond transaction

• Mandats to all participants in the SynLoan

- BoAML, BNP and Commerzbank mandated as Active Bookrunners, all other synloan banks mandated for a passive role

- Equal treatment of all passive banks in terms of earnings and all banks in terms ofleague table credits

• No benchmark-transaction available

- Market opener for deals of that size

- Formulation of new M&A event call (101 % if merger does not go through)

• Marketing and bookbuilding

- Compressed calendar: only nine working days after signing on roadshow

- Momentum built very quickly, books were closed within one hour

- Bonds were seven times oversubscribed

12 Funding through the loan and bond markelll0 May 2011

The bond marketMaturity profile

• Bond structure enabled investors to buy Merck yield curve:

- Two year tranche: EURm 500; 75 bp over mid-swaps; Coupon 2.125%

- Five year tranche: EURm 1,350: 100 bp over mid-swaps; Coupon 3.375%

- Ten year tranche : EURm 1,350: 125 bp over mid-swaps; Coupon 4.500%

• Sound maturity profile for the entire Merck bond portfolio

Maturity Profile

II

' .MERCKII

I

EURm1.500

1.250

1.000

750

500

250

o +----~

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

• Existing Bonds I Private Placements


. New Bonds

FX management

Contents


. , The loan market

. , The bond market

•. 'r-T-i-m-e-li-n-e-a-n-d- re-S-u-It- - - - - - - - - - - -

. , Lessons learnt


I11

'IMERCKI

I

"' IMERCKI

FX managementPurchase price hedging

• Due to the fx volatility and deal size hedging played an important role

- Funding was executed in EUR, but purchase price had to be paid in USD

- Option during auction process against "worst case" of EUR/USD of 1.30

- On the day of the acquisition agreement (Sunday) Merck started hedging viaforwards at 1,35 with the open ing of the Asian markets, finishing 20 hours later.

EURIUSD development between 01.01.2010 and Closing (15.07.2010)

,.~ 15.2.10<, 1.3.10""Option

r-; 1\ Fo ard~- -~-_ _ -l- _'I '-"'- 1.::11':1

/max. market value FWD ...' .. •

approx. EUR 610m ~

V'- t r"~ "',

\ V ..,." '0 ... ... "'. ""

15.07.2010

Market value FWD

approx. EUR 230m


Timeline and result

Contents


. , The loan market

. , The bond market

. , FX management

•. I~L-e-s-s-o-n-s-I-e-ar-n-t-----------------'


I I

IIMERCKI

I11

'.MERCKI'•

TimelineImportant milestones

> •

•••

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

•- -•••-•-

calendar week in 2010

Search for Arrangers

Development Merger Model

Bridge Loan negotiations

Negotiations share purchase agreement

Rating Process

Signing (28.02.2010)

Forward trading

Rating discussions

Update Debt Issuance Program

Bond Roadshow

Bond issuance

Syndication process

Financial integration

Cancellation Syndicated Loan

Closing (15.07.2010)


ResultSuccessful transaction

• Bridge financing with attractiveconditions was in place in time

• Appreciation of the transaction byrating agencies : BBB+/Baa2 ratingoutcome

ifrAWARDS2010

IFR:EMEA Loan of the year

IIi

' .MERCK••

• Successful and fast bond issuance atattractive pricing

• Successful syndication with furtherstrengthening of Merck's relationshipapproach

EUROWEEKEuroweek: TW NE v.: t'.:.fH: ;.:H I1; .... , hA~ ·_ A· l ;~ l !..,... , H:~ ,

Corporate issuer with the bestM&A related bond funding

TRFASURFR L--

l f r- ACT:Dea SO U Bond Deal of the Year

~ear l«


Credit magazine:Euro investment gradecorporate deal of the year

Dealsof theyear

Lessons learnt

Contents

• Merck at a glance

• The loan market

• The bond market

• FX management

• Timeline and result

•19 Funding through the loan and bond market I 10 May 2011

III

' .MERCKI

I

I•' .MERCK•I

Lessons learnt

• Prepare yourself well ahead of any potential transaction (DIP, CP, rating)!

• Competent lawyers on corporate as well as bank side facilitate effective negotiation!

• Use only one merger model and share it with relevant parties!

• Pace is key!

• Keep involved team as small as possible to ensure confidentiality!

• Avoid any discussions about league table credits - this can be painful!

• Keep your promises - you will benefit from that in the future!

• Ensure lawyers have a proper fax machine!


Thank you!

In case of questions please contact

Rando BrunsHead of TreasuryMerck KGaAFrankfurter Str. 2500-64293 DarmstadtPhone: +49-6151-72 34 97E-mail : rando [email protected]

or

Tim NielsenHead of Capital MarketsMerck KGaAFrankfurter Str. 2500-64293 DarmstadtPhone: +49-6151-72 86 80E-mail : [email protected]


II

'.MERCKI

I

Economic Outlook and Corporate Ratings Review

Chris DinwoodieManaging Director, Head of Corporate RatingsStandard & Poor's

ACT Annual Conference10 May 2011

CONFIDENTIAL AND PROPRIETARY.

Permission to repri nt or distribute any content from this presentation requires the written approval of Standard & Poor's.

Copyright (e) 2006 Standard & Poor's, a subsidiary of The McGraw-Hili Companies. Inc. AJI rights reserved.

nwMcGrow HIli CDmpafJln

Core Eurozone (and UK) Driving the Recovery

Main European Economic IndicatorsGermany France Italy Spain U.K. Ireland Eurozone

Real GDP (% change)2009 -4.7 -2.6 -5.1 -3.7 -5 -7.6 -42010e 3.6 1.6 1 -0.2 1.7 0.1 1.72011f 2.5 1.7 1.1 0.7 2.2 0.3 1.92012f 2.1 2 1.5 1.5 2.5 1.7 2

CPI inflation (%)2009 0.2 0.1 0.8 -0.2 2.2 -4.5 0.32010e 1.1 1.5 1.5 1.7 3.2 -1 1.52011f 1.5 1.6 1.8 1.8 3.3 0.3 1.82012f 2 1.8 2 1 2 0.5 1.8

Unemployment rate (%)2009 8.2 9.1 7.8 18 7.7 11.9 9.52010e 7.7 9.4 8.5 20.1 7.8 14.1 10.12011f 7 9 8.5 21 7.7 15 9.82012f 6.5 8.5 7.9 20.5 7.5 14 9.5

Source: Standard & Poor's 26 Jan 201 1e-Standard & Poor's estimate. f--Standard & Poor's forecast.

CONFIDENTIAL AND PROPR IETARY.

2. Permission to repri nt or distribu te any con tent from this presentat ion requires th e writt en app roval of Standard & Poor 's.

STANDARD&POOR'S

Upgrades Predominate Q410-Q111

EMEA Industrials Quarterly Rati ng Changes by Number(Source: S&P 15 Apr 2011)

100 -,--- - - - ----- - - - - - - - - - - - - - - - - - - - - - - - - - --- ----,

75IIIa>:;:;s:::W....

500L-a>..cE~

Z

25

oQ1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Ql-ll Q2-11

• Upgrades • Dow ngrades

CONFIDENTIAL AND PRO PRIETARY.

3. Permi ss ion to repri nt or distr ibute any con tent fr om thi s presentat ion requi res the written approva l of Standard & Poor's.

STANDARD&POOR'S

Overall Ratings Stability Returns

EMEA Industrial Ratings Changesby Broad Industry Categories

50% -.--- - - - - - - - - ------ - - - - - - - ----- - - - - - - - --,tilCl.l-e~

'" 40%OIl=~0

Q

~30%..

til

=-~20%

tilCl.l-e~

'"OIl 10%c.;J

~..til 0%==.-~

-10% --'---- - - - - - - ---- - - - - - - - - - --- - - - - - - - - - - - -'

QI-08 Q2-08 Q3-08 Q4-08 QI-09 Q2-09 Q3-09 Q4-09 QI-I0 Q2-10 Q3-10 Q4-10 Ql-11

- Stable Sectors - ConsumerlManufacturing Sectors - Highly Cyclical Sectors

Perm ission to reprin t or distribute any content from thi s presentation requires the writte n approval of Sta nda rd & Poo r's .4.

CO NFIDENT IAL AND PR OPRIETAR Y. Source: S&P April 2011 STANDARD&POOR'S

Normalisation in % Negative Outlooks Today

EMEA Industrials: Outlook/CreditWatch(Source: S&P 15 Apr 2011)

100% ,--- - .- - - - -

80%

60%

40%

20%

0%

• Negative Stable • Develop • Positive

CONFIDE NTIAL AND PROPRIETARY.

5. Perm iss ion to reprint or distrib ute any con tent fr om this presentation requ ires the writte n app roval of Sta ndard & Poor's.

STANDARD&POOR'S

·..Much Higher Proportion With Negative Outlooks A Year Ago

EMEA Indust r ials: OutlookiCreditWatch(Source 2S Fel> 20 I0)

1000;(,

80%

40 %

20°1.,

0%

._-_ ._~

• Negative Stable • Positive

6.

CONFID ENTIAL AND PROPRIETARY.

Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor's.

STANDARD&POOR'S

European Speculative Default Rate Back Below LT Average

European Sub-Investment Grade Default Rate(trailing 12mths %)

18%

16%

14%

12%

10%~e

8%

6%

4%

2%

0%

2003 2004 2005 2006 2007 2008 QI09 Q209 Q309 Q409 Qll0 Q210 Q310 Q410

_ Combined - Private Credit Estimates - Public Speculative Grade Ratings

Source : S&P April 2011

CONFIDENTIAL AND PROPR IETARY.

7. Permiss ion to reprint or distribu te any content from this pr esentation requires th e written approval of Stan dard & Poor's.

STANDARD&POOR'S

Significant Increase in Corporates Tapping High Yield Market

New European Corporate Ratings by Ratings by Category 2000-2010

180 ,------ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -,

160

140

120

~ 100.c5i 80

60

40

20

o2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: S&P GFIR and S&P CreditPro April 201I

CONFIDENTIAL AND PROPRIETA RY,

8. Permission to reprin t or distribute any content from th is presentation require s the wr itten approval of Standard & Poor's.

STANDARD&POOR'S

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