The IR behind a record bond issue

Oct 06, 2014
<p>Turk Telekom&rsquo;s IR team took a leading role in the company&rsquo;s $1 bn dual-tranche issuance earlier this year</p>

Many IR teams have little or no involvement in bond issuance and debt communications. One company that leans dramatically the other way is Türk Telecom: the $10 bn market cap firm made a striking debut on the debt market in June this year, raising $1 bn in a dual-trance offering, the largest and also first deal across two maturities from a Turkish company – with IR playing a leading role from start to finish.

Along the way, Türk Telecom’s IROs had to contend with a credit ratings setback, investment bank bumbling and a slew of other challenges. ‘It was an unbelievable experience for us,’ explains Onur Oz, head of IR.

Onur Oz, Turk Telecom

Onur Oz, Türk Telecom
‘The IR team was leading the communications with the JLMs and their counsel’

The story began when Türk Telecom decided it wanted to diversify its funding sources. Traditionally the company had funded itself through bank loans and other sources like the European Bank for Reconstruction and Development, although not through corporate bonds.

By tapping the debt capital markets, it aimed to expand its funding options in case of another banking or liquidity crisis, as well as extend the length of its debt commitments so they better matched its capex cycle. Another goal was to achieve a favorable interest rate on its debt, though this was secondary given that the cost would depend on the state of the market and investment appetite at the time of the deal.

Credit ratings search

Before debt could be issued, however, credit ratings had to be acquired – and this is where IR first joined the project. ‘We chose a ratings adviser – a bank – that would help us in terms of managing the relationships and everything else with the rating agencies,’ says Oz. ‘We were invited to the ‘beauty contest’ of the banks, which were candidates to be the ratings agency adviser. Ultimately, management decided that the rating relationships should be managed by the IR department.’

Oz points out that his team’s full name is the capital markets and investor relations department, making it a natural home for responsibilities that branch out beyond the usual equity-related duties of IR.

With an adviser selected, Türk Telecom decided to work with S&P and Fitch, and pitched its story to these credit ratings agencies, which involved presentations from the CEO, CFO and business heads. And here came the first obstacle: one of the two credit ratings agencies – S&P – came back with a lower rating than expected and desired. That meant more work for the company.

‘We continued to see whether we could explain ourselves, explain our story, better to the rating agencies,’ says Oz. ‘We felt some of the arguments were not understood well, so we consulted with our adviser to see whether we could push further. And the adviser recommended that we did.’ After lengthy engagement and the sourcing of new documents to offer additional detail on Türk Telecom’s liquidity agreements with local banks, S&P agreed to push the rating up to investment grade, the head of IR recalls happily.

Project team, prospectus and presentation

The next part of the story for IR involved helping to manage the project team, which included the five joint-lead managers (JLMs) working with Türk Telecom on the bond issue, along with lawyers and internal counsel. ‘In most cases, the IR team was leading the communications with the JLMs and their counsel,’ says Oz.

‘This involved writing the prospectus, or offering memorandum. It’s a lengthy document, 200-300 pages. Putting that together was a lot of work. The banks and their counsel were the pen-holders for putting this document together, so we had to make sure they understood Türk Telecom and its investment story very well. The whole IR team was involved in this. We have six people working in our IR department, and we had to assign all six to this project at some point.’

While the prospectus was being written, eyes remained fixed on the market to judge when the timing might be right to go to investors. In the end, Türk Telecom postponed the deal a couple of times due to the market situation, which resulted in three or four months of delay.

Along with the prospectus, a roadshow presentation also had to be produced. This document is handed out during the roadshow, but then collected again at the end of every meeting, as legally it’s considered best not to let investors keep two documents due to the possible confusion it might cause.

This brought about another issue for Türk Telecom, again leading to extra work for the IR team. The role of putting together the presentation was handed to one of the members of the banking syndicate, explains Oz, but when the first drafts came back they were disappointing, to say the least. ‘Once we were convinced the banks would not be able to deliver a presentation that would be accurately reflecting our investment story and be up to the quality level we expected, we decided to prepare our own version,’ he adds.

Oz says they got feedback from the investment banks on their version and that’s the presentation the company ended up using. ‘I think it was natural for the IR team [to do a better job] as we know the investment story better than anyone else,’ he comments. ‘The only thing we didn’t have experience of was the specifics of what fixed income investors were looking for.’

Off on the road

When the roadshow finally took place in June, the trip lasted five days, taking in London, Los Angeles, Boston and New York. During debt issues, the size and terms of the deal are not finalized until investor sentiment has been gauged during the roadshow. As Türk Telecom’s team moved from city to city, the sense grew that demand was strong and the company would be able to pull off a bigger issue than previously expected.

The roadshow visited the same investment firms Oz and his team had seen many times before, but the faces were new. ‘All these investors, the fixed income guys, we were meeting for the first time,’ he says. ‘The thing that we had to be very careful about was [that] historically we have been a high-dividend company. Bond investors are interested in the dividends but in the reverse direction.’

Given the high level of interest expressed throughout the roadshow, the deal team decided at the end to raise $1 bn – a record amount for a corporate bond out of Turkey. Investors were split on whether they preferred a five or 10-year maturity, so the decision was taken to do two $500 mn tranches to cover both options. Again, this was a first for a Turkish company.

Looking to the future, Türk Telecom expects to return to the debt markets and so has put a plan in place to keep that door open. The IR team has identified three or four of the larger debt conferences to attend throughout the year. In addition, the company receives fixed income investors at its headquarters in Istanbul when brokers bring them through.

The live credit ratings also require ongoing management. ‘They have to monitor us constantly, so they can come up to us just like any other investor or analyst and ask questions about what’s going on at the company,’ says Oz. ‘They join our quarterly earnings release calls, and we do annual review meetings with them.’

Overall he views the experience as hugely beneficial for the IROs who worked on it. ‘It was a great learning experience and provided great exposure for our team,’ he concludes. ‘The involvement we’ve had with this project is a little more than you might think IR would have.’

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