Woolworths accesses insurance market for innovative syndicated bank-guarantee facility

Friday, 03 October 2014

Woolworths has completed a A$400 million (US$351.5 million) transaction in relation to its Work Cover contingent obligations, accessing the capital markets as its ultimate investor base. The transaction is believed to be the world's first syndicated bank-guarantee facility placed exclusively with global insurance companies, and deal sources say it highlights the potential for deals of this type to free up bank credit lines for corporate borrowers.

Woolworths, along with many other Australian companies, manages its Work Cover obligations through self-insurance rather than acquiring insurance from third-party providers. To do this, the company is required to provide statutory authorities with bank guarantees to support its underlying obligations.

A key feature of the new transaction, which was completed in August, is the transfer of risk achieved by interposing a new capital source to assume the liability from the banks, thereby freeing up bank capital otherwise allocated to Woolworths.

The underlying bank guarantees will continue to be issued to relevant authorities by the facility's mandated lead arrangers and bookrunners – Commonwealth Bank of Australia (CommBank) and National Australia Bank (NAB). But the ultimate participants in the facility are global insurers, via underling indemnities implicit in the facility documentation.

Asrar Rahman, Sydney-based group treasurer at Woolworths, tells KangaNews that the scale of the transaction does not at this stage make a material impact on the company's ample access to credit. But the fact that its Work Cover obligations are an ongoing and significant financing requirement made it worthwhile to pursue a solution that placed the product in a "more natural market" well ahead of any – unanticipated – future capacity constraints in the bank market generally.

Rahman says: "We were seeking a long-term, innovative solution which took advantage of the prevailing strong appetite for our credit in capital markets. Our objective was to access a market which has deep liquidity and presented a better fit for this type of product, and to do so at a time of our election – before the scale of our requirements could be tested in years to come by saturating bank market capacity. We also wanted to make more efficient use of our banks' balance sheets."

Insurance appetite
Woolworths and its leads say the transaction attracted significant interest from insurers in the US and Europe despite its status as a new and innovative structure. Recognising the importance of ensuring the structure aligned with the typical requirements of global insurance companies, CommBank introduced ACE Insurance (ACE) as a "key consultant" to work with Woolworths and its leads. As a participant to the transaction, ACE provided valuable insights which, Rahman adds, were integral to its success.

In the end, eight global insurance companies participated in the transaction following roadshows in New York and London. Participants included "global benchmark names in the insurance sector" with deal volume oversubscribed by more than double, according to Woolworths and its leads.

Specifically, they say that the initial book was more than A$1 billion in indicative commitment at "attractive bid pricing". At the conclusion of the initial bid phase, Woolworths and the leads together determined pricing based on responses received from insurers. KangaNews understands final pricing was 15 basis points tighter than initial guidance, though the level has not been disclosed.

Subsequent to determining final pricing, the selected insurers were requested to deliver unconditional credit approval to the facility. By the specified date for delivery of fully approved commitments, the leads say unconditional binding commitments of more than A$900 million had been delivered at the final clearing price.

"We learned that many insurers' portfolios are heavily concentrated in local markets and in specific sectors like construction and property" says Sean Sykes, executive director, loan markets and syndications at CommBank in Sydney. "The opportunity to access a credit like Woolworths, being a blue-chip Australian company with a strong financial profile, was incredibly attractive."

Demand came through from insurers despite the deal structure representing a new concept for them. Bank guarantees have been acquired by insurers before, Sykes says, but only on a single-buyer basis. "All the participating insurers had to set aside their normal expectations associated with underwriting typical insurance type risk, and to be comfortable with participating alongside other insurers in a syndicated structure," he explains.

The deal does not completely remove the issuing banks from the equation. Rahman reveals that the US insurers were comfortable with leads not being participants in the facility. Insurers in Europe, however, considered it was important that the banks arranging the transaction should also participate alongside the insurers for a small percentage of the overall facility.

Andrew Ting, Sydney-based debt markets director in the non-rated and specialised originations team at NAB, says this aspect of the transaction was flagged early on by a couple of European sureties and was therefore a worthwhile inclusion given the important role played by these sureties.

In the end, CommBank and NAB retained 5 per cent of the facility each – effectively meaning Woolworths has released A$360 million of credit lines, previously consumed by bank guarantee issuance, across its major banks.

Prospects aplenty
Rahman and Sykes are both enthusiastic about the prospects for this transaction type being replicated by other companies. Rahman says more than 200 Australian companies meet their Work Cover obligations by self-insuring, requiring bank guarantees of the type Woolworths has now effectively sourced from global capital markets. And Sykes points out that any bank guarantees of sufficient scale could fit this type of transaction.

"It isn't an overly complex credit analysis for the insurer, either," Sykes continues. "The underlying risk profile in this case is Woolworths' credit risk – a corporate insolvency is really the only scenario where the insurers' obligation would be called upon. Like any credit investor, insurers have a proven capacity to assess credit risk and showed they will take a fairly straightforward view on the credit."

Indeed, syndicated bank guarantees could also be marketed to a larger investor universe than just insurance companies. Rahman tells KangaNews: "We are indifferent as to whether the participants were insurance companies, fund managers or other capital-markets investors. The important thing for us was accessing the capital-markets pool, and as it happened the solution we were brought by our leads involved insurers."

Ting agrees that this style of transaction could become more familiar. "There are plenty of opportunities for this structure including for a wider range of guarantees – such as traditional performance bonds – and it could also be marketed to a wider audience," he says.

The challenge to developing a broader investor base for the product might be its unfunded nature, given that many non-bank participants in capital markets typically prefer funded transactions in accordance with their investment mandates. Ting confirms: "The majority of surety bonds are uncommitted lines, so the question is if these can be turned into committed facilities – and, if so, whether this involves an added cost to the issuer."

According to Woolworths and its leads, the success of this transaction and the evident interest from insurers suggest there could be sufficient capacity in the sector to meet the requirements of most Australian issuers.

"Sureties are experts in understanding not just the credit aspect but also understanding the nature of guarantees and risks involved in the event of a claim." Ting adds.