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TCL US$325 m bond to refinance debt

Monday, May 12, 2014

Trinidad Cement Ltd (TCL) last week embarked on the North American phase of a road show, in a move aimed at securing funds for the repayment of existing debt, the improvement of working capital and ultimately the enhancement of value for its shareholders and other stakeholders. Last Saturday, the company advised of its intention to issue Senior Secured First Lien Notes (Bonds) in an aggregate principal amount not exceeding the equivalent of US$325 million. 


This is to be issued in a TT dollar denominated tranche to potential investors in T&T on a private placement basis, and in a United States dollar denominated tranche, which will be distributed in the United States and Canada on a private placement basis. The company expects to issue US$250 million to North American investors and US$75 million to T&T investors, however, this distribution may shift depending on demand in both markets as the issue is being offered in both jurisdictions and can be traded across borders. 


Some US$295 million from the proceeds of the offering will be utilised by TCL to repay all its existing debt. The remainder of the proceeds from the offering will be used for working capital improvement and to pay all associated fees and expenses estimated at between US$10 to 12 million.


Given the quantum amount (US$325million) and possible limited local appetite, two Canadian along with one Jamaican firm have been identified to underwrite the bond—GMP Securities LP, Byron Capital Markets Limited and Jamaica Money Market Brokers Limited (JMMB). TCL Group CEO Dr Rollin Bertrand said the road show is being done in New York, Boston, Toronto, LA, Minneapolis and Cincinnati to interact with as wide a cross section of sophisticated investors as possible. 


“TCL is a ‘first time issuer’ in the US bond market and therefore the road show has to be very rigorous as investors may not be not familiar with the company or with the Caribbean for that matter,” he said. 



While US-based credit rating agencies Standard & Poor’s (S&P) and Fitch have given ratings of B and B- respectively, both felt there was a stable outlook for the company. Citing such strengths as its regional scope and leading position, TCL’s proven ability to strengthen its operating margins in 2013, its 60 years of experience, geographic location and the fact that it operates in markets with limited supply by other cement producers, which can allow room for price increases. 


Fitch believes the company will be able to slowly deleverage, as operating cash flow should continue to improve as volumes and sales prices increase.



Further factored into the ratings is the favourable outlook for the Caribbean cement industry over the medium term driven by the region’s positive macroeconomic and business environment. Additionally, the company has no significant or immediate capital expenditures required in the medium-term, which should allow TCL to use its cash flow to repay debt and rebuild its cash balances.


Commenting on the rate the notes could be issued at, Dr. Bertrand believes that based on the ratings received from Fitch and S&P and their outlook for the company, TCL will be able to refinance the existing debt below the 10 per cent interest rate that it currently pays, but the final coupon will depend on the dynamics of the US bond markets over the next few weeks. 



He said: “The coupon is a reflection of the size of the offer (the bigger the better), the rating and the degree to which we are classified as an organisation operating in emerging markets.” 



TCL is confident that aside from anticipated lower interest rates, the most important benefit is the absence of principal amortisation over the next seven years. This will improve TCL’s cash flow by an estimated $170 million per year and can be used to improve EBITDA performance, pay down debt and restart the payment of dividends to shareholders at a modest level. 


The company considers the bond issue a significant improvement on existing arrangements to be far more covenant-friendly than the current arrangement of the override agreement with existing lenders. According to Bertrand, there are significant benefits for cash flows and interest payments and this flexibility will allow TCL to manage the refinancing risk prior to 2021 when the company aims to have around US$200 million in debt to refinance. 


The notes are expected to have a tenor of seven years, and to mature in 2021, at which time, the full principal amount will become repayable. Interest on the notes is expected to be fixed and paid on a semi-annual basis in arrears, commencing approximately six months after the issuance of the notes. Generally these notes have tenors of five and seven years with TCL opting for the longer tenor to allow itself adequate time to manage the refinancing risk and to enable de-leveraging of the balance sheet. 


The offer will be launched in T&T next week.


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