3. Sterling High Grade Corporate

Sterling High Grade corporate - Winner: Centrica

Bookrunners: Barclays Capital, BNP Paribas, HSBC, Royal Bank of Scotland

The timing of Barclays Capital's successful £750 million dual tranche launch for UK gas supplier Centrica was fortuitous, coming as it did in the week before the collapse of Lehman Brothers, but investor demand and placing owed everything to the planning beforehand.

The deal marked the first time single-A rated Centrica had ventured into the sterling arena for 23 months. The issuer opted for a dual tranche structure comprising a £300 million 10-year tranche priced at Gilts plus 250 basis points and a £450 million 25-year tranche priced at Gilts plus 253bp.

In terms of comparables, Centrica's short-dated 2012 and 2016 bonds were referenced - the latter trading around Gilts plus 190bp when discussions began and around 50bp wider immediately prior to launch - and Scottish & Southern's five-year euro and 30-year sterling deals issued in August.

Takeover talk

A three-day investor roadshow of the UK, ending on August 29, preceded the launch. The purpose of this was to reiterate the issuer's commitment to maintaining a single-A rating amid ongoing talks with British Energy about Centrica's possible purchase of a minority stake in the company, says Jeremy Froud, MD in debt capital markets at Barclays Capital.

"As a group we decided that a roadshow would make it easier for UK investors to see through the media noise, and, given their familiarity with the Centrica name, it would be faster and easier to sell to sterling investors. And, of course, sterling works well in ultra-long dates such as the 25-year maturity."

The deal includes a put option if a change of control results in a downgrade to junk and also coupon steps linked to any ratings change resulting from corporate activity related to British Energy. Should any of the three main rating agencies downgrade the issuer as a result of an investment of 10% or greater in British Energy assets within three years of the issue, then the coupon will step up 25 basis points for each downgrade.

Seasonality played a big part in the timing of the launch, as winter is traditionally a time for energy providers like Centrica to increase their working capital. It has to buy its gas supplies in advance, and demand increases at this time of year, but consumers do not tend to get their bills and pay for the gas they have used until the spring. In the past Centrica has been reliant on US funding, but given current market conditions it was felt it should raise the money beforehand. Froud says: "Centrica wanted to raise up to £750 million, but it was felt that having that amount in a single tranche could be a substantial refinancing risk so the company opted for two tranches."

The deal is also notable for being the first time that investors have been able to buy long-dated Centrica paper, and in the event this was the most popular tranche. As a result of significant oversubscription from investors, particularly for the newly available 25-year tranche, in excess of £1.3 billion was booked and there was some initial tightening from the original price prior to launch, and a slight tightening in the secondary market.

The buyers of both tranches were what BarCap termed "quality accounts, comfortable with owning long-term maturities", which, in the current market, Froud said was unsurprising. "Firms like Centrica are being seen as an ever-more defensive position."

Credit says... While the availability of funding diminished during 2008, businesses' appetite for cash did not. This is especially true of names such as Centrica. With normal funding options less attractive, the issuer opted to raise capital from the sterling bond market in advance, giving investors some valuable diversification in the process.

Issuer: Centrica

Date of issue: Sep 9, 2008

Size of deal: £750 million

Pricing: 250bp over Gilts (10yr, £300m), 253bp over Gilts (25yr, £450m).

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