Économie et Finance

OCP’s MAD 5 billion bond issue, 311% oversubscribed!

le 31 mai 2018


Last week, OCP issued a MAD 5 billion perpetual subordinated bond. The subscription period ran from 2 May to 4 May 2018.

This bond issue, approved by the AMMC 23 April 2018, saw 50,000 securities issued, each with a nominal value of 100,000 dirhams. Subscription was reserved for Moroccan qualified investors, comprising institutional investors, mutual funds, insurance companies and other pension funds.

The subscription period, which was shortened to 3 days, closed last Friday and the results were highly satisfying.

OCP’s perpetual subordinated bond issue was 311% oversubscribed with applications received for as many as 155,480 securities versus the 50,000 on offer.

All subscriber categories were catered for with a higher pro-rata allocation granted to mutual funds. The latter, which had subscribed for 122,480 securities, were awarded 22,000 i.e. MAD 2.2 billion or 44% of the offering.

The other institutional investors accounted for the remaining 56% with the following breakdown: pension funds 22.6%, Caisse de Dépôt et de Gestion, which alone accounted for 20%, banks 9.4% and insurance companies 4% only.

The results of the offering also reveal that OCP’s allocation by tranche was consistent with its interest rate risk calculations. Pride of place given to the longer-dated tranches as can be seen from the manner in which the MAD 5 billion worth of subscriptions was allocated.

Demand for Tranche C, which has an annually adjustable interest rate, exceeded MAD 10 billion but only MAD 109 million was allocated to it.

Demand for Tranche E, with a 20-year maturity, totalled MAD 1.125 billion and was fully met, followed by Tranche D, with a 15-year maturity, which was satisfied to the tune of 84.4%.

As far as unlisted Tranche A was concerned, with a 10-year maturity, just under 90% of subscriptions were met, totalling MAD 875 million dirhams. This was not the case for Tranche B, identical but listed, which garnered just MAD183 million.

This second perpetual subordinated bond issue, similar to the MAD 2 billion issue of 2016, has to be seen in the context of OCP Group’s corporate strategy.

The offering was proposed by OCP’s Board of Directors of 14 March 2017 and approved by the Ordinary General Meeting of 22 June 2017.

This domestic bond issue, comprising several tranches, with principal of up to 5 billion dirhams (MAD 5,000,000,000), took the form of perpetual subordinated notes, listed and unlisted, with the risk premium increased at each ratchet up date. The purpose of the 2018 perpetual bond issue was the same as that previously issued, which was to continue financing the Group’s investment programme.

This is entirely in keeping with the Group’s corporate growth strategy, adopted in 2008, which aims to position OCP as market leader in its industry.

Three fundamental pillars underpin OCP’s strategy, which is designed to not only develop the business but to transform it, as follows:

To enhance its status as a globally competitive enterprise by asserting leadership on both the cost front and in terms of production capacity and, above all, by adopting a flexible and nimble approach to both manufacturing and sales.

These three pillars underpin OCP group’s industrial development strategy, which is supported by it 20-year investment plan, for the period 2008-2028 and a MAD 200 billion budget.

In concrete terms, the investment programme aims to double mining capacity (extraction and beneficiation of phosphate ore), triple chemical production capacity (manufacture of fertilisers), drastically reduce production costs along the entire value chain, and increase the Group’s penetration of every importing region and the largest markets around the world.

The investment programme is designed to be modular and flexible and to be implemented in phases, the first of which was completed in early 2018.

This first phase, which was focused on the Khouribga-Jorf Lasfar northern axis, consisted of bolstering extraction, beneficiation and production capacity at the Khouribga mine, which now stands at 44 million tons.

Likewise, for the Jorf-Lasfar chemicals platform, which now has a production capacity of 12 million tons, after construction of 4 additional fertiliser production units, JFC1, JFC2, JFC3, JFC4 (JFC stands for Jorf Fertiliser Complex).

During this first phase of OCP’s industrial plan, a supply pipeline linking the Khouribga mine to the Jorf Lasfar platform was built, to be able to transport the washed rock as pulp and to enable it to be transformed automatically in the different units.

This pipeline has generated savings in terms of transportation and energy costs, resulting in lower production costs.

The capacity at the Jorf Lasfar port was also expanded to allow for larger loads. A seawater desalination unit for industrial processes was built, thereby preserving the water table.

Such developments are designed to diversify OCP’s product portfolio and satisfy the needs of an increasingly broad range of customers by offering specific products, which are available in more than 40 formulas that have been developed to date.

Over the past 10 years (2008-2018), OCP Group has spent nearly MAD 75 billion in implementing Phase 1. The majority of the investment has been made over the past 5 years.

The forthcoming second phase will focus on the central axis (Gantour-Safi) and the southern axis (Phosboucraa) and will also aim to optimise production in a similar way to that achieved along the northern axis.

OCP is financing this major investment programme by debt as well as equity financing.

The programme is being strictly monitored by two credit rating agencies, Fitch Ratings and Standard & Poor’s, which are reviewing the financial strength of Morocco’s largest industrial group very closely.

The main role of both agencies is to ascertain and gauge the Group’s solvency as an issuer.

OCP is currently rated BBB- Investment Grade, the same as Morocco’s sovereign credit rating and the same as its industry peers.

The company’s decision to issue a perpetual subordinated bond on the domestic market is part of its strategy to optimise access to the capital markets and diversify its funding sources.

In particular, this type of very long-term finance enables the issuer to bolster its capital structure and meet the capital requirements of its rating agencies.

So much so that, so as to maintain the same level of long-term finance as part of the company’s capital structure, OCP intends to finance any eventual redemption of this bond, at the time of redemption, by issuing either equity securities or pari passu-ranked securities on terms that are at least equivalent to the redeemed securities’ level of capital, as mentioned in the prospectus.

The issue’s features:

OCP’s perpetual subordinated bond offering comprises five tranches. Each tranche has a ceiling of MAD 5,000,000,000 (five billion dirhams) and a nominal value of MAD 100,000.

The unlisted Tranche A has an interest rate that is adjustable every 10 years and a first repayment option on its 10th anniversary.

Tranche B, which is listed on the Casablanca Stock Exchange, also has an interest rate that is adjustable every 10 years and a first repayment option on its 10th anniversary.

The unlisted Tranche C has an interest rate that is adjustable annually and also a first repayment option on its 10th anniversary.

The unlisted Tranche D has an interest rate that is adjustable after 15 years for the initial period preceding the first repayment option and every 10 years thereafter, with a first repayment option on its 15th anniversary.

Lastly, the final unlisted Tranche E has an interest rate that is adjustable every 20 years and a first repayment option on its 20th anniversary.

The total amount raised from the five tranches shall not under any circumstance exceed the sum of MAD 5,000,000,000 (five billion dirhams). For each tranche, the ceiling is MAD 5,000,000,000 with a maximum number of 50,000 perpetual subordinated bonds, each with a nominal value of MAD 100,000, being the maximum number of shares permitted.

Careful consideration has been given to the chosen rate of interest for each tranche to enable each investor category to make a choice on the basis of the terms of their liabilities.

As a result, for the unlisted A and listed B tranches, the interest rate is adjustable every 10 years, benchmarked against the 10-year rate, determined on the basis of primary market Treasury bond yields with the same maturity as of 27 March 2018 i.e. 3.23% for the initial 10 years, plus a risk premium of between 80 basis points and 100 basis points i.e. between 4.03% and 4.23%.

This rate is fixed for the first 10 years, in the knowledge that the first repayment option date is 14 May 2028. However, the perpetual bond’s repayment option is hypothetical since the issuer may not in fact exercise it in exchange for offering a step-up, that is to say, an increase in the rate of interest rate which will be, as of 14 May 2028, +25 basis points for the unlisted tranches and, as of 14 May 2048, an additional step-up of +75 basis points for the listed tranches, which is also valid for Tranche C.

As far as the unlisted Tranche C is concerned, the interest rate is adjustable annually, benchmarked against the 52-week rate, determined on the basis of primary market Treasury bond yields as of 3 April 2018 i.e. 2.30%, plus a risk premium of between 70 basis points and 90 basis points i.e. between 3.0% and 3.2% for the first year. It is worth recalling that its first repayment option is 14 May 2018.

Tranche D, also unlisted, has an interest rate that is adjustable after 15 years until the first repayment date and adjustable every 10 years thereafter.

Its interest rate is adjustable, benchmarked against the 15-year rate, determined on the basis of primary market Treasury bond yields with the same 15-year maturity as of 13 March 2018 i.e. 3.67%, for the first 15 years, plus a risk premium of between 100 basis points and 125 basis points i.e. between 4.72% and 4.92% for the first 15 years. Its first repayment option will be 14 May 2033.

As of 14 May 2033, a first step-up (rate increase) of +25 basis points will be proposed by OCP, another of +25 basis points on 14 May 2038, and on 14 May 2053, an additional step-up of +75 basis points.

Lastly, Tranche E, also unlisted, has an interest rate that is adjustable every 20 years, benchmarked against the 20-year rate, determined on the basis of primary market Treasury bond yields with a 20-year maturity as of 27 March 2018 i.e. 3.98%, for the first 20 years, plus a risk premium of between 110 basis points and 130 basis points i.e. between 5.08% and 5.28% for the first 20 years with a first repayment date of 14 May 2038.

Of course, from 14 May 2038, a first step-up (rate increase) of +25 basis points will be introduced, a second from 14 May 2058, with an additional step-up of +75 basis points.

The perpetual subordinated notes are allocated by auction, which enables the issuer to select subscriptions that best match the rating agencies’ requirements as well as complying with the same requirements as for OCP’s international offerings, as a result of which the company has become a benchmark in terms of its risk profile.

Therefore, Tranche E’s interest rate is adjustable every 20 years, Tranche D every 15 years, Tranches A and B every ten years. Only Tranche C has a rate that is adjustable annually.

As a result, OCP is able to minimise the interest rate risk arising at each revision date…

Afifa Dassouli

Original article : https://lnt.ma/lemission-obligataire-docp-de-5-mrdh-sursouscrite-a-311/