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Corporate bonds 29/11/2012

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Vlerick Finance Alumni: Are corporate bonds a good alternative to raise capital?

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Corporate bonds 29/11/2012

  1. 1. Are corporate bonds a good alternative to raise capital?29th November 2012
  2. 2. Finance Alumni Board Vlerick Alumni Offices: Reep 1 - 9000 Gent - Belgium + 32 (0)9 210 98 18 www.vlerickalumni.com
  3. 3. Upcoming eventsEvents DateCorporate Bonds November 2012Winter reunion December 2012Alum. Nights January 2013Chief Economists February 2013Students/Alumni speed dating February 2013Buying your own company February 2013Meet the Industry: Shipping Industry March 2013Meet the industry: Media April 2013Event Controllership May 2013Workshop on family businesses June 2013
  4. 4. Keynote SpeakersSpeaker Company and FunctionSophie Manigart Prof. Dr. Ir. Vlerick Business SchoolKris Devos Global Head of Debt Capital Markets Syndicate, INGGunter Vanden Neucker Partner, Vista Capital AdvisorsJan Staelens CFO, RoulartaJean-Yves De Vel CFO, Vemedia Pharma
  5. 5. AGENDA Introduction Banking environment and alternatives to classical bank financing Characteristics of corporate bonds and how to issue them Corporate bonds for small and medium-sized companies Testimonies of corporate bonds issuances Networking reception6
  6. 6. Sophie ManigartProf. Dr. Ir. Vlerick Business School
  8. 8. HIGH YIELD BOND ISSUES Public issues of high yield, rated bonds Ba 40% of issues B 50% of issues Caa/CCC to C 10% of issues
  9. 9. “PROPERTY BOND ISSUES SET FOR RECORD”FT, 26/11/2012 €20 bio raised by 134 European real estate companies in 2012  Up from €8.3 bio in 2011 Combination of private placements, retail bonds and public issuances Average cost of 4.74% (low of 0.75%, 5yr) Mostly small, family companies raising €1-5mio
  10. 10. WHY ISSUE BONDS? EUROPEAN CORPORATES… Refinancing  65% of all European bond issues  Issuers are  retiring shorter-term paper and/or lengthening maturities  Replacing existing bank facilities Less important: fund acquisitions or expansion (20%) Diversify funding sources, liquidity (12%)Source: Moody’s
  11. 11. ACTIVITY DRIVEN BY Traditional sources of lending (banking) are constrained  Basel III Low interest rates  De facto sponsorship of economy by central banks  Refund more expensive debt Take advantage of healthy demand for high yield bonds (TINA)
  13. 13. DEFAULT RISK?... IS CURRENTLY LOW Moody’s default analysis  European speculative grade default rate is 2.6%  12-month forecast is 2.8%  Lower than historical global average of 4.8%  Distressed debt index fell from 24.6% last year to 17.0%
  14. 14. DEFAULT RISK IS EXPECTEDTO REMAIN LOW IN ST However, in the medium term, “further significant deterioration in the economy would weigh heavily on what currently stands as a rather benign default outlook” (AXA IM)
  15. 15. 184 BOND ISSUES IN BELGIUM (2008-2012) 2008 2009 2010 2011 2012Total bond issues (million EUR) € 9.899,14 € 23.961,11 € 3.136,96 € 6.688,38 € 14.332,45Number of bond issues 44 34 31 28 47Number of tranches 50 47 39 31 68Number of firms that issued bonds 13 19 17 24 27Total bond issues (Public) € 8.519,54 € 23.278,76 € 2.281,71 € 3.746,30 € 11.077,34Numb er of pub lic firms 8 15 12 12 14Total bond issues (Private) € 75,00 € 275,08 € 40,00 € 244,19 € 775,00Numb er of private firms 1 1 1 2 3Total bond issues (Foreign sub.) € 929,60 € 148,49 € 0,00 € 1.527,89 € 366,91Numb er of foreign sub . 3 1 0 4 2Total bond issues (Government) € 375,00 € 258,78 € 815,25 € 1.170,00 € 2.113,20Numb er of government organizations 1 2 4 6 8
  16. 16. LARGEST BOND ISSUES IN BELGIUM Company Total amount Currency 2008 Fortis Bank 2.500.000.000,00 EUR 2009 ABInbev 5.500.000.000,00 USD 2010 ABInbev 750.000.000,00 EUR 2011 Ontex 835.000.000,00 EUR 2012 ABInbev 7.500.000.000,00 USD
  17. 17. BELGIAN PARTICULARITIES Retail investors do not require rating Bond market open for private companies  Etex / Aliaxis, Omega Pharma, Studio 100, Vandemoortele,…  Name recognition is sufficient (vastly oversubscribed) Very low yields  Cheap money for companies  Unfavorable risk/return for investors  But… TINA again
  18. 18. RETAIL BONDS: THE NEXT BUBBLE? Urge for  Stronger requirements for public placements  Stronger oversight of public issues This should not affect private placements  “Sophisticated” investors
  19. 19. WILL THE CURRENT TREND CONTINUE? Probably (Basel III) As long as central banks sponsor the economy New mindset in corporates  There are alternatives next to bank financing
  20. 20. Kris DevosGlobal Head of Debt Capital Markets Syndicate, ING
  21. 21. FINANCING POSSIBILITIESIN BOND MARKETSGent, November 29, 2012Kris Devos
  22. 22. CONTENTS  Debt Capital Markets : a quick snapshot  Pricing a bond  DCM funding alternatives : - The institutional bond market - The retail bond market - The US private placement market23 Debt Capital Markets
  23. 23. 1. DEBT CAPITAL MARKETS : A QUICK SNAPSHOT Amount International Bond Market Issuance 3.5 trillion USD international market (mio$) 4500 (issuance per year) 4000 3500 Dominated by Institutionally targeted deals 3000 2500 95% / 5% institutional vs retail 2000 1500 Growing in importance for corporates 1000 500 since start of crisis 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year Higher bank funding costs and implementation of Basel III makes DCM an interesting fuding tool for corporates Low interest rate environment creates challenges & opportunities. Funding diversification tool for issuers Multi currency / tenor market Possibility to swap coupon payments from fixed to floating and vice versa Issuers : Financials, Corporates, Sovereigns, Agencies, Supranationals. Debt Capital Markets
  24. 24. 2. PRICING A BOND  Mathematics behind it not too complicated  What is the right pricing? Mid Swap Interest Rate + Credit Spread  Main reference points : Objective Criteria Mid Swap Interest Rate Credit qualilty (external or internal rating) Covenants Tenors Sector & Country of Issuance Credit spread of issuer in secondary market Credit spread of comparable issuers in secondary market Subjective Criteria Name recognition Market sentiment Global rate environment Availability of investor funds Offer & Demand Debt Capital Markets
  25. 25. 3. DCM funding alternatives Pros Cons Comment Eligibility Criteria  Simplicity and flexibility  Tenors restricted (4-7yr) • Historically low midswap • HG & Crossover credits  No rating required  Psychological barrier of rate makes it difficult to • € 75/100 mio min size coupon show a decent yield I Retail Bond  Unique characteristic • Standalone, approved Belgian retail market  Necessity of name • Minimum credit quality to prospectus  Marketing element recognition allow retail placement. • € 1.000 min denomination  Tenors restricted (5 year) • When a pure retail deal is not feasible, this route • HG credits + limited HY  Possible without rating  Best effort could be an option. credits  Limited size possible  Time consuming processII EUPP for small size • For corporates having • € 10/50 min size  Tailor made difficult access to retail or  Professional investor base • € 100.000 min institutional market asking high risk premiums denomination • Very small market  Wide investor base, most  Minimum size (EUR 250m) • Prime alternative to bank • HG & HY credits liquid capital market funding: diversification  Pricing (new issue premium) and good demand • € 200/250 mio min size Institutional  No financial maintenance  A rating is strongly advisedIII covenants (for • Strong underlying • EMTN or standalone Bond Investment Grade) technical and fundamental program  Brings liquidity to your factors • € 100.000 min secondary curve • Very visible instrument denomination  Small size possible  Need of EMTN program if • Excellent tool to lengthen • HG & Crossover credits  Wide maturity spectrum – multiple transactions are debt maturity profile • $ 100/150 mio min size US Private long tenors feasible (10 – targeted over time • Perfect for limited fundingIII 15yr)  Financial maintenance • USPP lilght placement requirements covenants documentation  Attractive funding cost • Mainly $ funding  No rating required • $ 500.000 denomination Debt Capital Markets
  26. 26. BOND MARKET SEGMENTS : THE INSTITUTIONAL MARKETCharacteristic General comments • Institutional investors like their bonds to be liquid and therefore prefer benchmark issues (i.e. ≥ €500m). Sub-benchmark issues (minimum €250m) are possible, but this will have an impact on the price & liquidity of the bond and the investors willing Issuance amount to participate in the offering. • An issuer can announce a “benchmark” transaction and likewise keep some flexibility with regards to final size of the deal. • As opposed to the retail market, the maturity of a (plain vanilla) institutional bond can be anywhere between 2 years up to 15 years. We can see even longer maturities, but those would be an exception. We also have so-called perpetual bonds (a form Issuance tenor of hybrid) where the tenor can be a lot longer. • The sweet spot lies in the 5 to 10yr interval though • As opposed to retail investors who will pay more attention to the coupon of a bond, more experienced and specialized Importance of credit spread institutional investors will look mainly at the credit spread (vs midswaps) paid by the issuer. Additionally, as some investors will swap the fixed coupon, the credit spread will be the real key variable in an institutional offering. • With the actual pressure on (Eurozone) sovereigns, institutional investors are faced with few choices: invest in non-yielding but “safe” core sovereign paper, invest in higher yielding but more risky peripheral paper or choose for corporate bonds. Investment alternatives Since a few years investors have turned their attention and focus towards institutional corporate bonds as they offer a better risk/reward trade-off in many cases. • It is important for an issuer to have a rather liquid curve. For this reason, an issuer will expect the bookrunners to make a Secondary market market for the bonds they have issued. This will help determine the fair value of the issuer‟s outstanding bonds and will also facilitate future pricing. Debt Capital Markets
  27. 27. BENEFITS AND IMPLICATIONS OF AN INSTITUTIONAL BOND • The institutional bond market represents the bulk of the DCM activity. This market is a prime alternative to bank funding and a bond is a fairly straightforward product, therefore also quite popular amongst investors. Most liquid capital market • As there are plenty of market participants in this large market, volumes of funds movements from (supply) and to (redemptions) investors are quite high which should ensure a liquid market in normal circumstances. • Whereas in a retail offering, the coupon will be crucial, in an institutional transaction investors Fair pricing, regardless of yield will look at the credit spread as the main factor. This means that an issuer knows he will issue Benefits bonds at a relatively fair level, regardless of swap and yield levels • Institutional investors include asset managers, pension funds, insurers, private banks, hedge funds, etc…This is of course the largest investor base an issuer can have access to. Largest investor base • The absence of rating can have an influence on the investor base however as some investors will not be allowed to invest in unrated credits. • An institutional transaction will be the quickest way to execute a public trade. A frequent issuer Quick execution can announce a transaction in the morning (10am for instance) and be allocated and priced by 3 or 4pm the same day. • Less known credits or more infrequent issuers might have to organize a roadshow or at the very least an investor call to give investors the time and the opportunity to get acquainted with the Roadshow might be required credit. • Such roadshow has a cost of course and might additionally cause a reaction on the trading levels of the existing bonds.Implications • As opposed to retail deals where the market is in essence always open, an institutional transaction will take place when there is an issuance window. Macro and geopolitical events are therefore crucial here. Issuance window needs to be open • Issuance windows come and go for rated issuers. They are however much more infrequent for unrated issuers who will need a risk-on mode to access the market.Belgian issuers a.o. UCB, Anheuser-Bush Inbev, Belgacom, Telenet Debt Capital Markets
  28. 28. Bond Market Segments : Retail issueCharacteristic General comments • Retail investors are less interested in the size of a bond and subsequently an issuer can opt to issue below benchmark format Issuance amount • An issuer can announce a minimal amount and communicate that there is an opportunity that the transaction will grow. This will not set any expectations towards the investor community but will give the issuer additional flexibility in deciding on the final size. • Retail investors are mostly interested in the short- and intermediate tenors. Typically they would shy away from any tenors above 7yr. Issuance tenor • Although a 7yr tenor should not be excluded, slightly shorter dated tenors will be easier to place • Retail investors have a biased vision of yield and are mostly coupon oriented Perception of yield • With much emphasis on coupons, they is less focus on the spread over Mid Swaps although this credit spread should be a reflection of the credit quality of the issuer. • Retail investors will evaluate their alternatives. With swap rates being very low in the short-end of the curve it can be difficult to compete with higher yielding products. Investment alternatives • For instance, if bank deposit rates are relatively high in the short-end it might be favourable to consider the intermediate part of the curve • The distribution of a retail bond requires a support from the retail network of the lead banks Support from the retail • The retail network needs to be remunerated for its sales force involvement. This remuneration will come in the form of network retail fees, which will be paid by the retail investor (issue price adjustment) • Internal assesment on risk profile : eligibility : rating, credit, sector analysis, cyclicality of issuer Issuer Risk Profile • Further differentiation based on investment profile of retail/ private banking investors Debt Capital Markets
  29. 29. Benefits and implications of a retail issue • Given minimum denomination of institutional deals is typically 100k, retail investors do participate less in these deals. Diversify investor base • Large number of investors in the orderbook. • Retail investors are less focussed on secondary trading levels of existing bond issue. As such, Issue at a competitive spread issuers have the opportunity to price close or on the secondary cash curve of the existing Benefits issuer. • Institutional investors demand that bonds are actively traded on the secondary market. This Opportunity to issue below requires a minimal issue size of €500m benchmark format (<€500m) • As retail investors are pure buy-and-hold oriented, secondary liquidity is important but less relevant. • By targeting a specific region, a company with local name recognition that is not a frequent Access to the bond market issuer can issue a bond without embarking on a Pan-European roadshow • Retail investors have the highest level of protection under MIFID. Requires more administrative • In order to be MIFID compliant, the EU prospective directive has some additional preparation requirements that need to be met • In addition, the prospectus needs to be passported into the different offering jurisdictionsImplications • Real retail investor (not institutional private wealth managers) need more time to take their investment decision. As a consequence the bookbuilding phase is longer Market risk during the bookbuilding • Before the opening of the books the transaction is priced and as such, the issuer locks in the all- process in yield before completion of the transaction. The issuance spread widens when interest rates decrease. The issuer is exposed when swapping to FRN formatBelgian issuers a.o. Arseus, Befimmo, Bekaert, CFE, Delhaize, Etex, Fluxys, Kinepolis, Nyrstar, Omega Pharma, Roularta, Vandemoortele Debt Capital Markets
  30. 30. The USPP product in a nutshell1 • The USPP product establishes lending relationships with highly liquid, buy and hold US insurance companies • USPP offers a high level of flexibility in terms of size and tranching, whereby duration of the assets can be matched with the2 liabilities side, both tenor wise as well as currency wise • During 2012, 7-, 10- and 12 year maturities are most popular, with an average deal size of $250m • US Private Placement provides access to debt capital markets, without the necessity of getting a public credit rating or going3 through the entire prospectus process • Once the transaction is closed, it will receive a rating from the NAIC (National Association of Insurance Commissioners) • The private nature of the notes allows for marketing materials and documentation only to be shared with a limited number of qualified4 investors on a confidential basis and not registered with any exchanges or governmental authority • The USPP market is deep and very developed, with a large number of investors, principally insurance companies5 • The investors put considerable amounts of long-term, fixed-rate capital in mostly investment-grade (equivalent) companies from the developed markets • Cross-border transactions represent about 55% of total market volume, showcasing the appetite for European companies in the6 USPP market Debt Capital Markets
  31. 31. USPP :No need for a credit rating• While no explicit rating is required by the market, private placements are ultimately „rated‟ on a confidential basis by the National Association of Insurance Commissioners („NAIC‟), which is the self-regulatory organization of US insurance companies• Typically, the NAIC rating process is completed by investors after the closing of the transaction and does not affect issuers at all. The NAIC rating determines the reserve requirement of each investment made by insurance companiesNAIC rating equivalents and reserve requirements Reserve Moodys S&P Fitch requirement NAIC-1 Aaa, Aa, A AAA, AA, A AAA, AA, A 1% Investment Grade Baa1, Baa2, NAIC-2 BBB+ - BBB- BBB+ - BBB- 2% Baa3 Ba1, Ba2, NAIC-3 BB+ - BB- BB+ - BB- 5% Ba3 High Yield NAIC-4 B1, B2, B3 B+ - B- B+ - B- 10%• In absence of a public credit rating, the NAIC will normally undertake its own credit analysis, in order to determine the NAIC-rating• However for rated issuers, the NAIC will base its own rating on the ratings of the major rating agencies• Since the 2008 financial crisis, many investors are not willing and/or allowed to invest in sub-investment grade credits (i.e. NAIC-3 or below). Moreover, investors are rather sensitive to rating downgrades given the significant increase in reserve requirements• Belgian recent issuers: a.o. Befimmo, Sibelco Debt Capital Markets
  32. 32. Gunter Vanden NeuckerPartner, Vista Capital Advisors
  33. 33. Bonds for SME‟s Vlerick Presentation
  34. 34. Overview1. Why?2. Who is eligible?3. Issuers – Which SME?4. Investors – What are they looking for? 1. Private Investors 2. Institutional Investors`5. Private Placement vs Public Placement6. Example: Germany 35
  35. 35. Why?
  36. 36. “Basel III morerestrictive for SMEfunding” Source: McKinsey
  37. 37. Current financing structure 0 30 60 100 70 40 EU SMEs EU Corporates US Corporates Bank Market 38
  38. 38. Bond market is also Fred & Ginger 39
  40. 40. Issuer‟s considerations Pros ConsCredit diversification Transaction effortAdditional to bank funding All-in funding costLonger maturities Required transparencyCovenant-Light 41
  41. 41. Investors – What are they looking for? Size Name High Liquidity Recognition Coupon Rating Transparency 42
  42. 42. Placement Challenges High No Name Coupon Structured Recognition 43
  43. 43. Placement Challenges Illiquid Small High StructuredCoupon No Rating (Fund, CDO,...) Lack of Transparency 44
  44. 44. Private Placement versus PublicPlacement Public PrivateCoupure N/A Min 100.000 EURProspectus FSMA approval No FSMA approvalRating Not mandatory Not mandatory Euronext or Alternext,Liquidity Euronext or Alternext NPEXSize Min 10 mio EUR Min 5 mio EUREligibility “Granny test” 45
  45. 45. Example: Germany 50 46
  46. 46. Sample of German issuancesIssuer Issue date Maturity Coupon Amount Industry/sec Rating (yrs) tor issuerUnderberg Apr 2011 5 7.125% 50 Alcoholic BB+ beveragesValensina Apr 2011 5 7.375% 50 Fruit BB beveragesFFK May 2011 5 7.250% 25 Waste BB+Environmen treatmenttKatjes Jun 2011 5 7.125% 30 Fruit gum BB+ makerBastei Oct 2011 5 6.750% 30 Publisher BBBLübbeKatjes Mar 2012 4.3 6.170% 15 Fruit gum BB+ makerFriedola Apr 2012 5 7.250% 25 Plastic BBUniwheels Apr 2011 5 7.500% 50 Supplier BB+ automotiveKTG Agrar Sep 2011 5 6.750% 50 Agriculture BBBRoyalbeach Sep 2011 5 8.125% 25 Sportswear BB+Golfino Apr 2012 5 7.250% 12 Sport (golf) BBB- clothes 47
  47. 47. Take-aways “The challenge lies in reconciling 1,5 Bio EUR in SME credit diversification with 200+ Bio of cash on the sidelines” AA+B=BBB? 48
  48. 48. Gunter Vanden Philippe Jadoul Neucker Partner Partner +32 475 42 71 +32 476 91 61 72 64 pja@vistacapital.gvn@vistacapital. be beVista Capital Advisors NV – Lambroekstraat 5a – 1831 Diegem - +32 2 719 04 20
  49. 49. Jan StaelensCFO, Roularta
  50. 50. The “Bond Experience”
  51. 51. Dr.No• Existing Financing Ways : Private Bond Bank Loan Public Bond Leasing Stock Exchange Security Backed Loans Factoring Own Equity, Savings Pledge future earnings Family & Friends Angel Investors, Venture Capital Crowdfunding Private Equity
  52. 52. Die another Day • Constraints of existing Financing : • Banks reorganisation (Basel) • Involvement • Covenants – Ratings • Expensive Private Bond Bank Loan • Uncertainty on short term • Visibility Public Bond Leasing • On Balance (IFRS) • Expensive • Residual Value• Visibility Stock Exchange Security Backed Loans • Linked by security• Rating • No freedom on• Under pressure assets• Working Capital Factoring Own Equity, Savings • Risk vs ST debt • Risk Pledge future earnings Family & Friends • Annoying if something is wrong Angel Investors, • Expensive Venture Capital Crowdfunding Private Equity • Exit • Involvement • Uncertainty • Finance ST> • Volatile Operational Strategy LT • Exit
  53. 53. For your eyes only• Why Roularta chose for a Public Bond :  Independence from banks – diversification of financing  Preparation easier due to the fact of already being listed  Wellknown brand(s) to big public  High cost, but LT (6 years) stability  Short term preparation  No financial covenants
  54. 54. Thunderball• Still some risks:  Visibility  Rating during preparation  Due date < 6 years  Direct link to the public  Secondary Market
  55. 55. Casino Royale• Why was the issue a big success :  Return vs. market uncertainty and low bank intrests  Confidance in a known local enterprise  Belgian citizens are savers  Confidance in the leading banks  25% Institutional Investors : 7x oversubscribed  75% Public Investors : 4x oversubscribed  Sold out in 30 minutes  Return on secondary market is important
  56. 56. Jean-Yves De VelCFO, Vemedia Pharma
  57. 57. Private Placement of a Subordinated bond by PRESENTATION TO VLERICK ALUMNINovember 29th, 2012 JEAN-YVES DE VEL, CFO 59
  58. 58. Fast growing company in the OTC industry- Belgian public (non listed) company, spin-off of Solvay since 2002- Producer and distributor of different OTC brands- Very strong position and focus on the sleeping & calming product category- Leading position in the Netherlands, significant stake in the sleeping & calming segment in key countries Belgium, Italy, Spain, Portugal and export to other EU countries and beyond- Supplier of pharmaceutical compounding ingredients to Belgian pharmacies (ABC Chemicals)- Sales of €66.0 million in 2011 (€54.9 million in 2010) and EBITDA of €13.2 million (€9.8 million in 2010) with a sound balance sheet structure, B 2012 : >80 mil € and >15 mil € EBITDA- History of successful organic and external growth Buy-out of Vemedia Acquisition of Viatris Acquisition of Acquisition of BV from Solvay by Manufacturing BV, ABC Valdispert Sleepzz and CEO, Nico Alberts Chemicals SA and brand from Podosan brands and 3rd partner Distributie Care BV Solvay 1961 2009 2005 2007 2011 2002 2006 2008 2010 CEO becomes sole Sale of Baldrian Acquisition of Valdispert Brazil Establishment of owner after acquiring Dispert brand for Acquisition of Methapharma sold back to Vemedia BV the shares of the Germany and Austria Imgroma BV NV Solvay other shareholders to Cheplapharm 60
  59. 59. Activities OTC market (Non-prescription bound) Medicinal Medical Cosme- Food supplements products devices ceuticals Boughtwith pre- Bought without prescription3 Bought without prescriptionscriptionActivity sales split (2010) 8% OTC distr. - Vemedia 12% owned OTC distr. - Third party owned Contract 19% 61% manufacturing ABC Chemicals 61
  60. 60. Activities (cont‟d)Marketing, sales & distribution- Proprietary and third party sales teams- Distribution of third party products to optimise sales force- Main distribution channels are pharmacists, drugstores and supermarkets Vemedia headquarters Geographical sales split (2010) Vemedia subsidiaries Vemedia export destinations Vemedia license fee contract 6.4% 1.7% Netherlands Non penetrated markets 7.3% Belgium 7.1% Italy Spain 14.0% 63.5% Portugal Export & License fee contract
  61. 61. Activities (cont‟d)Research & development Idea generation Market assessment Development Launch Post launch evaluation NPD, R&D, Regulatory, NPD, Sales, Marketing NPD, Sales, Marketing, NPD, R&D NPD, Regulatory Production, Quality & Logistics Finance & Logistics Additional ideas from Supported by the external partners via “Vemedia Innovation the “Open Innovation Center” for scientific Platform” underpinningProduction & contract manufacturing- 2 state of the art production units in Diemen (the Netherlands) and Wauthier-Braine (Belgium)- Capacity optimisation by contract manufacturing- Capacity can be tripled without additional investments 63
  62. 62. Broad range of niche OTC productsCategory & brands % of sales Picture Countries (position)Sleeping & calming Valdispert: Netherlands 23.0% (#1), Belgium (#4), Spain- Valdispert (#1), Portugal (#1), Italy- Sleepz (#1) - Melatomatine:- Melatomatine Netherlands (#3)Vitamins & minerals 10.6% Dagravit: Netherlands (#3)- Dagravit- Roter Roter: Netherlands (#5)Cosmeceuticals Podosan: Spain (#3) 4.3%- Podosan Sebamed: no ranking- Sebamed available)Joint health Osteoplus: België (#1)- Osteoplus 4.1% Glucon Combi: Netherlands (#2)- Glucon Combi 42.0% of total sales (based on 2011 sales and full year consolidation of Imgroma) 64
  63. 63. Global OTC market (€74 billion in LTM Q1 2011) Outperforming the pharmaceutical market 18% 16% 13.7% 16% 14% 12.6% 11.9% 14% 11.4% 11.1% 11.5% 11.0% 10.8% 10.9% 11.1% 11.2% 12% 12.1% 12% 11.3% 10% Market growth 9.7% OTC share 10% 8% 7.5% 7.5% 7.7% 7.7% 8% 7.1% 6.9% 7.0% 6.6% 6.5% 5.9% 6% 6% 5.5% 5.3% 4.8% 5.1% 4.6% 4.4% 4% 4% 2.5% 2.2% 1.8% 2% 2% 0% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Pharma market growth OTC market growth OTC share of total pharma market OTC outperforming the pharmaceutical market as of 2008: - the pharmaceutical market is plagued by generics tightening their hold on key therapy areas and by low R&D productivity - the growth of the OTC market is underpinned by several driversSource: IMS Health 65
  64. 64. Drivers of the OTC market1 Demography: ageing population - Greying population due to baby boom and longer life expectancy - Clear correlation between age and health expenditure Source: European Commission 66
  65. 65. Drivers of the OTC market (cont‟d)2 Prescription bound to OTC switching - Governments to reduce margin on prescription bound products and switch from prescription bound to OTC status to decrease spiralling healthcare costs3 Increasing number of distribution channels - Supermarkets, gas stations, etc. - Online drugstores and pharmacies4 Consumer empowerment - Preventive health care and feeling young and healthy - Easy access to healthcare information (internet) 67
  66. 66. A Transforming Competitive Landscape OTC market is still highly fragmented, resulting in a lot of M&A activity Ongoing consolidation in the OTC market driven by Big Pharmas reinforcing their position in the Rx-to-OTC switch segment and niche OTC players making acquisitions to become more competitive on an international scale Big Pharma players are investing heavily in the OTC market, attracted by stable revenues, no patent expiry risk and attractive investment returns (e.g. Sanofi-Aventis‟ acquisitions of Chattem and Oenobiol) Top 10 players account for approximately 50% of the global OTC market; the rest of the market is highly fragmented  Vemedia has the opportunity to become a consolidator in the OTC market where only few pure play OTC / consumer care companies exist The OTC competitive landscape (worldwide) Major player in Western Europe 100% 90% 14% 80% 70% 11% 60% % OTC sales 50% 55% 9% 40% 8% 30% 20% 3% 10% J&J Bayer GSK 0% Novartis Omega Others 0.000 1.000 2.000 3.000 4.000 5.000 6.000 7.000 8.000 9.000 10.000 FY2010 OTC Sales (€m) Source: companies websites and broker reports
  67. 67. OTC Moving towards a Mixed Business ModelThe winners will be those companies that successfully combine the power of science with knowledge of the customer Pharmaceutical versus FMCG company advantages
  68. 68. Reasons to issue a subordinated bond Organic - Further strengthening the position in the sleeping & calming growth in market sleeping & - Through the (geographical) roll out of the Company‟s sleeping calming & calming products in Europe - (Geographical) Expansion of the brand portfolio through Growth acquisitions of OTC brands and/or businesses Acquisitionsfinancing - Several acquisition opportunities are being investigated, of which one or more may be realized within the next 12m - Development of the distribution and sales organization through Emerging partnerships in Russia and China markets - Positive contribution to the Company‟s results in a medium- term period of time - Repayment of mezzanine financing of KBC Bank and Indufin Debt re- Mezzanine - Including deferred interest, the repayment amounts to €7.4structuring repayment million (per 31/12/2011) - This repayment will result in lower interest costs 70
  69. 69. The process• KBC Securities selected as Arranger & Bookrunner and Bank Degroof as Co-manager• Process took 5 months (including year-end holiday period)• We opted for a subordinated loan to keep extra leverage capacity via sr. debt.• Steps: placement agreement – private placement memorandum (prospectus) – due diligence (define scope) – business plan review (to ascertain the reimbursement capacity)• Market sounding and negotiation of the modalities with the banks• Marketing phase: institutional investors and HNWI – road shows – one-to-one meetings• Aim was to raise EUR 10-15 Mio. End result 19,2 Mio, 2/3rd on 5 years and 1/3rd on 7 years. 71
  70. 70. Term & conditionsStatus of bonds Subordinated and unsecured obligationsIssue amount €10 million to €15 million, which can be increasedNominal value per bond €50,000Issue price 100.0%Maturity Tranche A: 5 years Tranche B: 7 yearsCoupon Tranche A: fixed cash coupon of 9.0% per year Tranche B: fixed cash coupon of 10.0% per yearRepayment amount at maturity date 100.0% of the principal amountVoluntary early redemption On coupon payment dates only, 1% penalty per missed couponChange of control Both issuer (2 month coupon penalty) and bondholder (1 month coupon penalty) have the right to trigger an early repaymentSubscription period 1 March, 2012 - 7 March, 2012Payment date 12 March, 2012Covenants & Events of default to provide some protection for the Bondholders 72
  71. 71. Food for thought & Conclusion• Successful operation that allowed Vemedia not to lose momentum on its growth path and to do several acquisitions…• …but no „walk in the park‟: heavy due diligence, intensive process, with a price tag.• Corporate bonds are excellent to diversify the financing of a company….• …but they‟re not an alternative for equity.• Big difference in the approach followed by banks for retail bonds compared to private placement…• …which raises some questions: • Is a „light‟ procedure with „limited‟ due diligence requirements justified for retail bonds? • Are the risks on retail bonds correctly rewarded? • Is a new bubble in the making? 73
  72. 72. Q&A Finance Alumni, Your Financial Network
  73. 73. Thank you Finance Alumni, Your Financial Network
  74. 74. Networking Drink Finance Alumni, Your Financial Network