Hong Kong telecom company PCCW surprised markets on Thursday by pricing a $500 million five-and-a-half-year Reg-S bond. There had been no warning that PCCW would print, but on the back of strong half-year results and amid relative quiet markets, the issuer saw the opportunity to execute a swift intra-day trade.
“Yields hit a number they were happy with, the results stirred a strong reaction and the market was in good shape,” said one source. “The combination of these factors made them go ahead with this opportunistic trade.”
The new PCCW 2016s were issued with a 4.25% fixed-rate coupon and were reoffered at 99.607 to yield 4.331%. At the time of pricing, this was equivalent to a spread of 288bp over the five-year US Treasury yield.
With no earlier indication to investors that it would come to market, PCCW took advantage of the rarity value the credit presented given the five-year gap since it last issued international debt. This was back in 2005, when it sold $500 million worth of 10-year bonds.
With little to chose from in terms of Asian investment grade telecom companies, the bookrunners -- HSBC, Morgan Stanley, Royal Bank of Scotland and Standard Chartered Bank -- viewed PCCW's existing 2015s as the most liquid benchmark.
At the time the new deal was announced, the existing 2015 bonds were trading at 270bp over five-year US Treasuries. The half-year maturity extension for the new bonds (to February 24, 2016) was estimated by one source close to the deal to be worth 14bp. Adding a new issue premium as well, the bookrunners went out with an initial yield guidance of 295bp to 300bp over Treasuries, which was later revised to 290bp.
When the initial guidance went out, the borrower said it was aiming for a $300 million deal. However, as it became clear that a strong order book was building, PCCW increased the size to $500 million.
When the books closed on Thursday afternoon Hong Kong time, the arrangers had secured $6 billion of orders from over 300 investors -- the largest order book ever for a Hong Kong corporate borrower. Asian investors bought 74% of the bonds with European investors picking up the remaining 26%.
There was also a big take-up from real money accounts, with fund managers buying 57% of the bonds. Private banks took 22% and banks 10%, while the remaining 11% was split between insurance companies and other types of investors.
When the Asian markets opened on Friday, Hong Kong bonds were trading 2bp to 3bp tighter, despite overnight weakness in the US. The yield spread on the new PCCW 2016 bonds narrowed to 282bp and by the end of Friday’s session had tightened even further to 277bp.
With such a strong performance in both the primary and secondary markets, the new issue helped the broader PCCW curve to tighten and the spread on the existing 2015 bonds came in by 15bp during Friday’s session.
One banker said that the well-executed 2016 trade “reminded the market that deals will still get done in this environment [at] the right price”.
This point of view rings true for well-known names such as PCCW. And it also shows that despite the markets going quiet over the past few trading sessions, liquidity is still strong.
The senior unsecured bond received a Baa2 rating from Moody’s and the equivalent BBB from Standard and Poor’s. Both agencies attached negative outlooks to the bond.
The investment grade ratings are a reflection of PCCW’s dominance in the telecommunications and broadband markets in Hong Kong. However, both agencies pointed to the increasing domestic competition and the risks related to the company's growth strategies as points of concern for the future.
“The negative outlook reflects our view that Hong Kong Telecommunications’ profitability may not meaningfully improve due to competition and pricing pressure on its growth businesses -- broadband, mobile, and television,” wrote Standard and Poor’s.
The issuer was PCCW-HKT Capital No 4 and the guarantor to the bonds was HKT Group Holdings and Hong Kong Telecommunications, both of which are wholly-owned subsidiaries of PCCW.
