18 March 2011 | By Andrew Pugh
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Porterbrook Leasing’s Stephen McGurk was involved in one of 2010’s most complex refinancings, when the rolling stock company (Rosco) raised more than £500m with two capital market bonds. The bond issues were used to refinance debt from the company’s takeover two years before.
In 2008 the company was acquired from Abbey National by a consortium of investors led by Deutsche Bank, Lloyds TSB and Antin Infrastructure Partners, the BNP Paribas-sponsored infrastructure fund, for a reported £1.5bn. The buyout came at the bleakest point of the credit crunch, when Abbey owner Santander decided that Porterbrook no longer fitted with its core retail banking business. The acquisition was funded by senior secured debt facilities provided by a syndicate of banks including Abbey UK Corporate Banking, Barclays Capital, BNP Paribas, Calyon (now Crédit Agricole), Dexia and Lloyds TSB.
Under the terms of the debt facilities, consortium members were tied into bullet repayments, each with a different tenor. The first of those repayments was due in 2011, but by the end of 2009 McGurk and his colleagues were already thinking about how to repay the first instalment.
They were confronted with a dilemma facing many companies: how do you refinance when bank lending has almost ground to a halt?
“The long-term and stable nature of the business was such that we decided the best avenue was the capital markets,” says McGurk.
The 2008 acquisition was completed six weeks after the collapse of Lehman Brothers. It hardly took a soothsayer to foresee the banks were in for rough time, and Porterbrook’s buyers ensured the inter-creditor agreement allowed the company the ability in principle to refinance its debt via the capital markets.
In January 2010 refinancing efforts began in earnest, with a series of discussions with the bank syndicate that funded the acquisition. McGurk admits this was one of the toughest parts of the project, given the number of players involved and the competing interests of the banks being asked to sit alongside bondholders.
Porterbrook announced its intention to access the capital markets in April 2010, but received a setback shortly before the bond offer when the sovereign debt crisis hit.
“That put the whole thing on ice, but fortunately, as we had started the process well in advance of any debt maturities, we weren’t in a hurry,” says McGurk. “When we did issue the bonds it in effect reopened the sterling bond market after a number of weeks with no issuances.”
Despite launching the bonds at an uncertain time, McGurk insists the company was not concerned.
“We were confident in our story and in the business,” he says. “Our business is based on long-term leases with good counterparties. I knew we had a good story we could sell to investors.”
Despite this confidence, the company still had work to do in selling the story, with senior management wooing investors at a series of roadshows.
“We were the first Rosco to go to the capital markets to partially refinance acquisition debt, so a certain level of education was needed,” explains McGurk.
In the end, the bonds were oversubscribed and the company issued two sterling bonds with a combined value of £520m.
Porterbrook is one of the three big UK Roscos. The other two are Angel Trains and Eversholt Rail Group (formerly HSBC Rail). Both have recently followed Porterbrook’s lead and issued sterling bonds.
“We wanted to be the first to ensure we were able to adopt a structure that fitted our business needs rather than following one dictated to us by others,” says McGurk.
The refinancing has provided Porterbrook with access to further funding for capital expenditure. Last year, for example, it bought £54m of rolling stock from train operator Southern. “That was something we were interested in before the acquisition in 2008, but for various reasons that was put on hold,” says McGurk.
Porterbrook was able to finance the acquisition thanks to a feature in its debt facilities allowing it to draw down funds for expenditure either to fund new acquisitions or refurbish stock. In the meantime, the company is looking to finance its next tranche of debt. Although it is still exploring its options, McGurk believes that whatever it decides, things will be a lot easier next time.
“What we did last year broke the back of it,” he says.
- Give yourself plenty of time, well before any maturities.
- Choose your refinancing product carefully (eg banks or bonds).
- Hire experienced financial and legal advisers and get the best out of them, but don’t let them run away with the process.
- Undertake a thorough legal review to ensure the most efficient way to reach the desired commercial agreement.
- Ensure competitive tension is maintained at key points in the process among finance providers.
- Ensure you have a supportive bank group, including swap solution.
- Set timescales that are realistic but sufficiently challenging to keep all parties engaged.