On the Deal: Bought Deal Breakdown

TransCanada lined up an enormous amount of funding to purchase Columbia Pipeline

Before the deal team at TransCanada Corp. could execute on its historic US$10.3-billion acquisition of Columbia Pipeline Group Inc., it had to achieve another monumental feat — the completion of what was then the largest bought-deal financing in Canadian history, involving more than a dozen financial institutions. Here, the transactional team gives us a rundown of the preparation involved, challenges overcome and lessons learned.

The Columbia acquisition was announced in March and the bought deal closed in April, so that’s not a lot of time to pull something like this off. Are the banks lined up well in advance?

Johnston, Bentley, Archer (Deal Team):
  TransCanada had to ensure that it had financing arrangements in place such that, if all conditions to the transaction were satisfied, it would be able to fully fund the purchase price of approximately US$10.3 billion. Similarly, Columbia needed to be comfortable that TransCanada had made adequate arrangements so as to ensure certainty of financing before it agreed to enter into and announce the transaction with TransCanada. These separate but similar requirements necessarily meant that work on the entirety of the transaction financing structure commenced well in advance of the Columbia acquisition being announced on March 17, 2016. ... And because of the need to ensure confidentiality regarding all discussions pertaining to the acquisition and related financing, it was important that all required work be undertaken by a tight, focused, experienced transaction team comprising TransCanada and its legal and financial advisors and the financing parties and their legal advisors.

So, having regard to such a significant financing requirement, as well as TransCanada’s existing capital structure, TransCanada sought to develop a financing plan that was executable in the capital markets, that fully funded the deal at the most effective total cost of capital, and that also ensured TransCanada maintained its high-quality credit ratings. This led to the development of separate but inter-related principal financing sources, being a planned equity offering and bridge term loan credit facilities, which collectively had to provide certainty of funding for the full US$10.3-billion purchase price of the acquisition. Each of these financing pieces would ultimately prove to be one of the largest ever undertaken by a Canadian issuer, and together they represented a market-defining financing structure in support of an M&A transaction by a Canadian issuer.

TransCanada has deep transaction execution expertise in both the public capital markets and in the corporate lending market. ... As a result, TransCanada had a highly experienced internal deal team drawn from its finance and legal groups who led all internal work, and directed and worked with their regular external securities and banking counsel — Blake, Cassels & Graydon LLP in Canada and Mayer Brown LLP in the US — to undertake the necessary preparations for the contemplated financing transactions. These outside counsel were brought into the focused internal deal team in early February to assist the TransCanada team in designing, negotiating and documenting arrangements for both the equity raise and the bridge loan. Norton Rose, as Canadian securities and banking counsel to the underwriters and bank lenders, and Paul Weiss, as US securities counsel to the underwriters, were brought in shortly thereafter.

Lexpert: With over a dozen financial institutions participating in Canada and the United States, is this the kind of deal that requires a large multinational firm?

Deal Team: The securities counsel involved in this transaction were Blakes and Mayer Brown, acting for TransCanada in Canada and the US, respectively, and Norton Rose and Paul, Weiss, acting for the underwriters in Canada and the US, respectively. Blakes also acted as Canadian counsel for TransCanada in respect of the bridge term loan credit facilities, and Norton Rose acted as Canadian counsel for the bank lenders in connection with such facilities. However, as the governing law for all financing transaction documents was Alberta law, and the equity offering involved the filing of a prospectus and registration statement solely in Canada and the US, there were no counsel involved in advising on financing matters outside of Canada and the United States.

Lexpert: There also seems to have been a lot of participation from in-house counsel at TransCanada. How has the relationship with in-house evolved over the past few years?

Deal Team: TransCanada is a highly active issuer in the Canadian capital markets as it continues to actively finance its ongoing long-term capital program ... The regularity with which TransCanada accesses the capital markets and the breadth of financing transaction structures it has employed over the past few years have resulted in TransCanada’s internal legal and broader financing team having highly developed financing, structuring and execution expertise.

TransCanada’s finance law team has expertise in all forms of capital-markets deals and is responsible for general transaction coordination both internally and with Blakes and Mayer Brown. Internal and external counsel have developed a common understanding of expectations regarding documentation responsibilities, communication approaches and execution expectations. For certain transaction types that TransCanada has executed on multiple times, such as preferred-share and conventional debt financings, TransCanada leads on documentation and looks to Blakes and Mayer Brown to provide general support, and to collaborate in discussing any proposed changes to deal structure, market developments, securities law changes and matters of that nature. When TransCanada looks to implement transactions that are more novel, such as its 2015 Formosa bond offering, or its 2015 TransCanada Trust hybrid offering, Blakes and Mayer Brown are asked to take on greater shared roles with the TransCanada internal team in document development, issue mitigation and transaction execution. Norton Rose and Paul, Weiss regularly act for the underwriters on TransCanada financings, and their familiarity with the company and its internal and external teams, as well as their deal experience, contributes to seamless transaction execution.

Lexpert: What would you say was the most challenging aspect of arranging this financing?

Deal Team: The most challenging aspect of arranging the capital-markets and credit financings were managing the myriad demands of the financing preparations, including disclosure document drafting, negotiation of terms of key financing agreements, diligence and translation with both a necessarily tightly controlled, yet multi-party, deal team and the uncertainties typical of an M&A deal of this nature regarding the pace and outcomes of deal negotiations.

As is not uncommon, the parties at times found themselves moving apart during deal negotiations, then finding “breakthroughs” that accelerated transaction timelines, and irrespective of this cadence on the M&A side of the transaction, the financing plan had to adapt to such changes and be ready when needed to allow the parties to execute.

Lexpert: Being a part of one of the largest such financings in Canadian history, what have you learned that you can apply to the next big finance deal?

Deal Team: The internal legal team at TransCanada observed that you can’t fully anticipate how a multi-faceted deal of this nature will unfold and noted that, as an issuer, you can never be too prepared. TransCanada does financings on an opportunistic basis so they have things like a financing diligence data site ready to go on an “evergreen basis.” ... They also highlighted the value of a well-coordinated internal team. Transactions of this nature draw in a variety of players including members of the legal, finance, tax and investor-relations teams — dedicated people who understand the big picture and value effective communication.

Blakes echoed the comment regarding the critical importance of clear and regular communications, noting that acquisition-related financings demand careful planning and integration of the M&A advisory team and the financing advisory team, as the former can often involve an unpredictable timeline. ... Ultimately, if the M&A begins to solidify, it is essential that the financing structure be implementable, and so regular deal team updates, careful timeline management and the ability to deal effectively with emergent issues is critical.

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