British American Tobacco raising hybrid capital


British American Tobacco raising hybrid capital


Published Date: 2021-09-28 | Source: INCE|Community | Author: The Finance Ghost

British American Tobacco raising hybrid capital

Get ready for a sentence that could leave a worse taste in your mouth than the cigarettes themselves: BAT will issue EUR2 billion in perpetual subordinary fixed-to-reset rate non-call securities.

Sheesh. It's not often these days that I come across something I haven't seen before, but this was new to me. Luckily, there's a 156-page prospectus explaining the transaction, in case you are currently unemployed and have enough time on your hands to read it. I don't have that kind of time either, but I did try and pull out some interesting bits.

"Fixed-to-reset" means that the interest rate on the securities will be at a fixed rate until a specific reset date. For example, there's a EUR1 billion tranche priced at 3% per annum until December 2026. If not redeemed (i.e. paid back) by then, the price jumps to 3.372% above the 5 year swap rate. Amazingly, there are rules governing the pricing all the way until 2046, by which time some people might be smoking on Mars.

This is clearly a very long-term instrument. It is subordinated to the senior debt, which means that the holders of senior debt (usually banks) will be ahead of this instrument in the queue to get repaid if BAT ever runs out of people to sell products to.

The juicier stuff starts on page 16, where BAT highlights its key risks.

The first risk highlighted is competition from the illicit trade. I was half expecting South Africa to get an honourable mention here for our lockdown bans, but BAT is a global giant and we aren't big enough to be highlighted. Instead, the company notes various contributing factors to the illicit trade, like increasing levels of tax, price increases, economic downturn, lack of law enforcement and weak border control.

Other than the usual boring stuff about political and other risks, BAT also highlights risks in the
"New Categories" supply chain, which is still being developed. BAT defines this segment as including Vapour, Tobacco Heating Products (THP) and Modern Oral products. Simply put, demand is unpredictable in this space and supply chain crunches are a notable risk.

A further risk I want to touch on is the group's acknowledgement that broader ESG trends may impact the ability to retain key employees. This resonates with me, as I personally couldn't get excited about working for a tobacco company.

In summary though, BAT is doing this to raise euro-denominated funding that more efficiently aligns with where the earnings are coming from. The proceeds will be used to repay debt, so the long-term nature of these instruments means that BAT is essentially reducing its overall leverage through this issuance.


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