Deutsche Post AG, Europe’s largest postal service, sold 2 billion euros ($2.61 billion) in bonds to reduce the burden of pension costs on earnings.
Investors bought 1 billion euros of debt convertible to stock once the shares rise 30 percent from today’s price, as well as two conventional bonds totaling 1 billion euros, to almost double funds available for German employees’ retirement payments, the Bonn-based company said today in a statement.
Germany’s government demanded Deutsche Post repay 298 million euros in pension subsidies in May following a European Commission ruling that state funding provided since 1989 breached antitrust legislation. Pension provisions at Deutsche Post, whose employees in Germany represented 39 percent of its global workforce in 2011, topped 4.4 billion euros as of Sept. 30, according to the company’s nine-month earnings report.
“It’s very clever of Deutsche Post because they’re using their financial strength to continue funding their pensions,” said Jochen Rothenbacher, a Frankfurt-based Equinet analyst who has an accumulate recommendation on Deutsche Post. “It’s also earnings accretive.”
Deutsche Post shares fell as much as 1.7 percent to 15.82 euros and were trading down 1.6 percent at 5:10 p.m. in Frankfurt. The stock has gained 34 percent this year.
Companies in the European market sold $1.87 trillion in bonds this near, slightly less than the $1.99 trillion raised in all of 2011, according to data compiled by Bloomberg.
The convertible bonds can be exchanged for 48 million common shares and have a 0.6 percent coupon, Deutsche Post said. They were initially offered to investors with a coupon range of 0.25 percent to 0.95 percent, according to a previous statement. The debt has a seven-year maturity and cannot be redeemed by Deutsche Post before five years, it said.
The postal operator, which also owns the DHL express-delivery and freight-handling brand, sold 700 million euros in 12-year conventional bonds yielding 100 basis points more than the benchmark swap rate. It also sold 300 million euros in eight-year debt at 60 basis points over the swap rate. A basis point is 0.01 percentage point.
“We are very pleased with the results of today’s placement,” Chief Financial Officer Larry Rosen said in the statement. “We view the strong demand and the attractive terms as a renewed indication of the high standing enjoyed by Deutsche Post DHL.”
The company, which is seeking to increase profit as much as 45 percent by 2015 by trimming administrative costs and expanding DHL, had 4.2 billion euros in outstanding debt before today, according to data compiled by Bloomberg.
“We expect a positive effect on our earnings and an improvement in our cash flow,” Rosen said in an earlier statement. “Our employees benefit from the additional security of knowing that the financing of their pensions has been separated” from business performance.
Deutsche Post’s 2.95 percent bonds due 2022 fell 0.6 percent to 104.69 cents on the euro, the biggest drop on Bank of America Merrill Lynch’s EMU Corporates Non-Financial Index of investment-grade corporate debt. The yield premium that investors demand to buy the notes relative to the swap rate widened 7 basis points to 78 basis points, according to prices compiled by Bloomberg.
The yield spread on Deutsche Post’s notes compares with 106 basis points for the EMU Corporates Non-Financial Index, which tracks 948 company securities with an average maturity of five years.
The debt-sale funding of a greater portion of Deutsche Post’s pensions will improve operating cash flow and have a “small positive effect” on net income, the company said.
Deutsche Bank AG was the global coordinator and joint bookrunner for both sets of bonds. BNP Paribas SA, Citigroup Inc. and Morgan Stanley were the joint bookrunners for the convertible bond, with Commerzbank AG, HSBC Bank Plc, ING Groep NV, JPMorgan Chase & Co. and UniCredit SpA the joint bookrunners for the conventional bonds.
Deutsche Post, which is led by Chief Executive Officer Frank Appel, contributed 530 million euros to its pension fund for this year, according to the nine-month report.
The company has a credit rating of Baa1 with a positive outlook at Moody’s Investors Service. Fitch gives Deutsche Post debt a BBB+ grade with a stable outlook. Both ratings are the third-lowest investment grade.