Seeking to reduce its cost of debt and improve financial metrics, under the leadership of group treasurer Lynda Heywood, Tesco’s treasury has carried out a series of liability management transactions for the group, while pursuing operational efficiency and more effective risk management via the adoption of a new treasury management system (TMS).
The team’s success in these initiatives was all the more commendable given the range of well-publicised challenges that Tesco has faced in recent years, inside and outside its business.
Following a lengthy absence from the new issue market, October 2018 saw Tesco’s first new bond issue for four years, in the form of a five-year €750m bond with a yield of 1.482%.
Despite relatively volatile conditions, the order book included more than 300 accounts.
Tender offers for selected notes were launched at the same time as the new issue was announced. The tenders were structured as a capped offer, with a prioritised US leg and a non-US leg launched simultaneously.
The focus on deployment of the group’s cash to reduce gross debt has driven a continued improvement in Tesco’s debt metrics
Tesco repurchased €685m equivalent nominal of notes, a deal aimed to strengthen the balance sheet by smoothing the company’s debt profile, partially refinancing 2019 redemptions and also targeting high-coupon, long-dated stub positions to achieve interest cost savings.
Meticulous planning contributed to the success of the combined transaction, which took place only one week after Tesco was upgraded one notch to BBB- by Fitch – Tesco’s first investment-grade rating since being downgraded to sub-investment grade in 2015, and testament to the team’s active and effective engagement with credit rating agencies.
The Fitch upgrade had a notable impact on Tesco’s secondary spreads.
Other highlights included the repurchase of £600m equivalent of notes in April 2018, as well as the financing of Tesco’s £4bn takeover of Booker through the issuance of new shares and existing cash and the subsequent integration of Booker’s liquidity management.
The focus on deployment of the group’s cash to reduce gross debt has driven a continued improvement in Tesco’s debt metrics and an impressive 35% reduction in its finance costs compared to 2016-17.
Alongside these achievements, the treasury team’s accomplishments also included adopting a new TMS in February 2018.
This initiative came as part of a wider finance transformation project to increase efficiency while providing greater visibility over the group’s exposures in order to hedge more effectively.
The new Openlink TMS has automated the company’s treasury, cash, trading and risk operations, providing end-to-end visibility over global financial flows and broader commercial risks, such as commodities exposure. Beyond this, the initiative has also broadened the scope of the treasury function and increased the treasury’s ability to deliver strategic benefits to the business as a whole.
The judges praised Heywood and the whole team’s achievements in the company’s impressive range of transactions and initiatives in this comeback story.
“It’s good to see Tesco achieve something quite exceptional alongside some impressive deals. Since putting together a new team, Tesco has excelled across the board.”
The Treasurer’s Deals of the Year Awards recognise the outstanding work of treasurers, both within the treasury community and the wider business world. Through them we champion the success and achievements of treasury teams that have stood out in the market over the prior 12 months. Winning an award is a great way to strengthen your organisation's and your treasury's profile, bringing peer and industry acknowledgement.
This article was taken from the Deals Edition 2019 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership