The deal was marketed as a ôbenchmark-sizeö issue which indicated only that it would be at least $500 million and the fact that the company was able to raise twice that amount should be a positive sign for AsiaÆs sluggish new issuance market. This is also the first debt issue of size in Asia since mid-June when Korean refiner SK Energy raised $450 million from a five-year deal, and the fact that it got done at all may well have prompted a sigh of relief among other potential issuers around the region.
The Reg S/144A bonds came at a spread of 237.5bp over Treasuries for a yield to maturity of 6.343%. They were indicated in the 10-year Treasuries plus 240bp-area on the final day of bookbuilding last Thursday and earlier in the week investors said there were unofficial whispers from the bookrunners about a potential pricing in the mid-200s. Typically such a reference would suggest a range of 10bp either side (although with quite a lot of flexibility), while the 240bp-area is commonly taken to mean plus or minus 2.5bp. The bonds were issued at a price of $99.319, which gave an annual coupon of 6.25%. HSBC and Morgan Stanley were joint bookrunners.
The offering attracted a lot of attention since this was the first ever foray to the debt capital markets by the Hong Kong utility, which was founded as far back as 1863 and is controlled by Lee Shau Kee, one of Hong KongÆs most high-profile property tycoons. Interest was also fuelled by the fact that HK & China Gas is rated A1 by MoodyÆs and A+ by Standard & PoorÆs and has near monopoly status when it comes to the supply of piped gas in Hong Kong, which gives it a stable and predictable cash flow. At the same time it operates in a non-regulated industry that enables it to pass on rising fuel costs to its customers. The company is also expanding in China, although that is something which is perhaps of more interest to equity investors.
One source referred to it as an ôideal creditö to be brought to market at such a volatile and choppy time. The deal attracted more than $2 billion worth of demand.
But even with the scarcity of this kind of paper, investors are clearly not prepared to pay just any price, as evidenced by the fact that the bonds came with a sizeable new issue premium. The issuer also gave up its earlier plans for a 30-year tranche, suggesting that it was unable to reach a workable combination between size and price. While initially flagged to investors, the 30-year tranche was never actually launched to the market, although the bookrunners let it be known that they would take reverse inquiries from investors.
Sources say there were a lot of mixed views in the market about the appropriate level of pricing, with Asian investors who were already familiar with the company û albeit not as a debt issuer û prepared to take the deal at ôfar tighterö levels than the real money accounts in the US. This was reflected in the mid-200s reference number that was floated in the market on the third day of bookbuilding, which was deliberately vague to give the involved parties a chance to better gauge where the market felt the acceptable fair value was.
Some observers argue that the bonds came cheap and note that they were priced wider than a $500 million 10-year bond issued by Swire Pacific earlier this year, even though Swire is not as strong a credit. The Swire bond came to market at 260bp over Treasuries, but has since tightened to the mid-130s.
Sources close to the deal argue, however, that a sizeable premium is necessary to get a deal this size off the ground in the current volatile environment.
ôAt the moment the market is demanding that all issues globally come with a new issue premium. The pricing has to reflect value plus a bit extra to get people to play,ö one source says.
Either way, the yield spread tightened about 12.5bp in Asian trading Friday to a bid/offer spread of 125bp/120bp, making it a highly profitable trade for the investors who got their orders filled. Some investors also compounded their gains by putting on a parallel trade (to their cash order for HK & China Gas) and buying protection in the form of five-year credit default swaps on either Hutchison or Swire. Because HK & China Gas is a better credit than both those, this trade enabled investors to lock in a lot of carry, which is otherwise hard to come by.
Given its debut status, this issue was always going to have to be driven by Asian investors, with investors from other regions likely to come in only once they were happy with the level of Asian demand. Notably the company completed two full days of meetings in Singapore as opposed to the customary one day. The two marketing teams also visited Hong Kong, London, Jersey, Los Angeles, Boston and New York.
In the end, 54% of the deal went to Asian investors, 13% to Europe and 33% to the US. About 140 investors came into the book.
In terms of investor type, asset managers took 49%, private banks 11%, banks 6%, insurance companies 32% and 2% went to others.
The volume of new debt issuance in Asia has been extremely thin this year as volatile spreads and tight liquidity have posed a significant challenge to issuers. According to Dealogic, it took 213 days for debt volumes in Asia ex-Japan to break above $15 billion this year (which it did last week), compared with only 115 days in 2007. However, bankers keep referring to a sizeable number of new issues that are expected to come after the summer, and it seems likely that HK & China Gas decided to take advantage of a slightly more stable market after the Wachovia results last week to beat everyone else to it before the asset management community takes its traditional August holiday.
ôIssuance windows are likely to be short and sweet. If you can get a window without too much supply you have got to take it, because it isnÆt clear when the next opportunity will present itself,ö says one source.
The company said it will use part of the net proceeds to refinance some existing bank borrowing, while the rest will be used for capital expenditure or for general corporate purposes.
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