Transportadora de Gas del Sur (TGS), Argentina’s largest natural gas operator, used a piece of US high yield technology – a tender for callable securities – to clean up its balance sheet. The deft terming out and cost cutting earns TGS the LatinFinance award for Best Corporate Liability Management.
The transaction, a combination of new issue and tender, cut TGS debt by 20%, from $631 million before the transaction to a manageable $500 million, according to Merrill Lynch, joint lead on the transaction with JPMorgan. Besides eliminating legacy debt from restructuring that contained restrictive covenants and cash swaps, TGS extended the average life of its debt portfolio to 8.5 years, from 2010/2013. It also reduced debt service cost significantly, to 7.875%, says Merrill. And the trade expanded TGS’ universe of investors to include high quality real-money EM and high yield buyers.
The two step transaction consisted of a tender for all TGS’s outstanding debt and a new $500 million 10 year amortizer, the biggest Argentine corporate issue since the 2001 sovereign default. The tender was highly successful, achieving a participation of almost 90%, according to JPMorgan.
TGS used the conditional tender for currently callable securities format, which is primarily utilized in US high yield. “TGS was the first time the tender technology of this shape and form was deployed in an emerging markets construct,” says Merrill. The conditional nature of the tender offer provided protection to TGS given the large size of the new issue and mitigated negative carry costs associated with a standard cash raising/call exercise.
TGS also employed an exit consent to modify the call notice period from 30 days to just five days to minimize potential negative carry associated with exercising the call on the untendered portion of notes. Synchronized settlement of new issue and tender helped bring existing holders in.
The new issue was more than six times oversubscribed, with orders from approximately 200 investors. Strong demand allowed the issuer to tighten initial 8.000% area guidance to price at 7.875%. In order to accommodate the issuer’s debt amortization profile and reduce refinancing risk, the securities included four annual amortization payments at the back end. TGS’s strong credit profile allowed the issue to be rated two notches above the sovereign by Moody’s, at B1.
“The TGS 2017 new issue, due to its size, current coupon, and strong distribution, will serve as a new benchmark for corporate bonds in Argentina,” says Merrill. It adds that bond stayed above par during the first week of trade, despite a 10-15 basis point widening in the Republic of Argentina. LF