The £4.43 billion refinancing of broadcast and telecoms operator Arqiva closed on 28 February 2013, and was the culmination of a process that started in November 2010. Arqiva’s in-house treasury group was working towards a June 2014 deadline to refinance the £3.4 billion in acquisition and refinancing debt that closed in 2007.

The NTL Broadcast business gave the renamed Arqiva a monopoly business providing broadcast services to the main UK terrestrial channels. The National Grid Wireless business provided tower capacity to UK mobile operators.

Arqiva’s business features a mix of regulated a stable broadcast services (up to 75% of revenues), and a combination of mobile towers, satellite services and digital television spectrum. It resembles both a telecoms operator and a regulated utility.

The refinancing from 2007 was typical of the lending climate of the period. The seven-year debt package included a combination of vanilla interest rate swaps and an accreting index-linked inflation swap. The inflation swap allowed the operator to match its obligations to a customer contract stream that is index-linked. It also offered the borrower a generous 2.2% coupon.

In the period after the 2007 deal, the Macquarie International Infrastructure Fund sold its 8.7% stake to existing shareholders at a loss, and in 2009, the Canadian Pension Plan Investment Board paid A$2.2 billion ($1.9 billion, including debt refinancing) to buy Macquarie Communications Infrastructure Group, which owned 48% of Arqiva.

The Arqiva group of shareholders now comprises Canada Pension Plan Investment Board (48%), Macquarie European Infrastructure Fund II (MEIF III, 25%), Industry Funds Management (14.8%), the First State Superannuation Scheme-managed Health Super (5.4%), Motor Trades Association of Australia Superannuation Fund (5.2%) and two smaller Macquarie-managed entities (1.5%).

The sponsors had two main options for refinancing the 2007 debt – a whole business securitisation or a leveraged loan/high-yield refinancing. The high-yield refinancing would have required a less complex structure, and minimised interaction with ratings agencies, but would have left the borrower at the mercy of the high-yield market’s vagaries.

The whole business securitisation, on the other hand, required an investment grade rating, a complex holding company structure, and careful negotiations with bank lenders. But it provided a way of dealing with the £2.5 billion mark-to-market liability on the accruing inflation swap. This swap ran for 20 years but featured a break clause that allowed for the swap’s termination at the same time as the bank debt’s maturity.

Rather than improvise a series of settlements with different sources of capital, Arqiva decided to find £3.8 billion in new money, and mandated Rothschild to advise on the process. The refinancing involved negotiations with bank lenders, swap counterparties and ratings agencies.

The agencies’ expectations set a ceiling on the transaction’s senior debt component of £2.3 billion at triple B flat, with room for another £600 million in junior debt at triple B minus. This meant that the shareholders would need to find over £800 million in new equity, or two years of Ebitda, based on Arqiva’s results for the year to June 2012.

The shareholders had stopped taking dividends from 2010, and converting those retained dividends into equity accounted for £467 million in new equity and £401 million in new cash contributions from the sponsors accounted for the rest. The shareholders’ longer investment horizons made the decision easier, and, as Arqiva’s director of treasury and finance, Roger Burge, notes, “having a stable financing platform is important to our customers, which have long-term relationships with us.”

Central to the restructuring was the borrower’s ability to coordinate the interests of the senior bondholders in the whole business securitisation, the swap counterparties, and the bank lenders. Arqiva paid down swap providers what had accrued up to the close in financing, and offered them an increase in coupon.

The swaps retain super-senior priority over the rest of Arqiva’s debt, but banks gain reassurance from the fact that as long as the swaps are paid in cash the providers have no ability to enforce on their security. Bondholder comfort comes from a covenant under which the accretion must stay below 8% of outstanding debt, forcing Arqiva to pay down the accretion regularly.

The mix of debt types was necessary because the entire £2.9 billion debt requirement would not come from one source. The eventual mix included £1.568 million in three- and five-year bank term debt, as well as £700 million in undrawn facilities – a £400 million five-year capital expenditure facility, a £100 million five-year working capital facility, and a £200 million 364-day liquidity facility.

The banks and bond lenders lent to distinct financing companies (fincos), because the banks’ shorter-dated maturities might expose the WBS vehicle to refinancing risk. The finco makes a 20-year loan to the issuer, isolating the refinancing risk to that company. Banks, however, receive a guarantee from the main issuer that they can take control of the issuer if the finco fails to roll over its debt.

At close the capital structure then included a £600 million high-yield tranche due 2020 with a coupon of 9.5%, and two senior tranches, both of which priced at 250bp over Gilts – a £350 million soft bullet tranche with an expected maturity of June 2020, a final maturity of June 2035 and a coupon of 4.04%, and a second £400 million tranche with an average life of 12.6 years, a maturity of 2032 and a coupon of 4.882%.

After the refinancing closed, Arqiva closed a US private placement, with the proceeds going towards paying down the bank debt. That placement included two 12-year tranches – one of $358 million (featuring a cross-currency swap) and one of £163 million.

The eventual financing structure for Arqiva features no less than 12 financing or holding companies, and that does not include entities through which the sponsors hold their stakes. For instance, while the private placement debt ranked pari passu with the WBS debt, its issuer had to be a Plc, because the WBS vehicle could not convert to a Plc.

But the deal will be influential, at least as far as it can be, given the limited applications of the UK-centric whole business securitisation structure. Other telecoms mast owners might consider the structure, and the June 2013 securitisation of breakdown assistance company AA, which is consumer-focused but enjoys stable cashflows, drew heavily from the Arqiva experience.