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
5 Funding through the loan and bond market 110 May 2011
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- bo- nd- m- a- r-k-e-t - - - - - - - - - - - ------,
. , FX management
. , Timeline and result
. , Lessons learnt
6 Fundingthrough the loan and bond market 110 May 2011
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
9 Funding through the loan and bond market 110 May 2011
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
11 Funding through the loan and bond market 110 May 2011
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
13 Funding through the loan and bond market 110 May 2011
. New Bonds
FX management
Contents
_ , Merck at a glance
. , The loan market
. , The bond market
•. 'r-T-i-m-e-li-n-e-a-n-d- re-S-u-It- - - - - - - - - - - -
. , Lessons learnt
14 Funding through the loan and bond market I 10 May 2011
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
15 Funding through the loan and bond market 110 May 2011
Timeline and result
Contents
_ , Merck at a glance
. , The loan market
. , The bond market
. , FX management
•. I~L-e-s-s-o-n-s-I-e-ar-n-t-----------------'
16 Funding through the loan and bond market I 10 May 2011
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)
17 Funding through the loan and bond market 110 May 2011
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«
18 Funding through the loan and bond market 110 May 2011
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!
20 Fundingthrough the loan and bond market 110 May 2011
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]
21 Funding through the loan and bond market 110 May 2011
II
'.MERCKI
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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.
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