Asia’s corporate hybrid market is buzzing again after investors’ dismal experience with the instruments last year. State-owned China Resources Power and Philippine port operator International Container Terminal Services (ICTSI) both closed deals last night, raising close to $1 billion in total.
Their growing popularity is thanks to investor-friendly structures and the desire by issuers to lock in rates. “All the perps are coming with resets/step ups, which investors are more receptive to, having seen how the Hutch perps have outperformed CKI and Noble,” said Jacob Samuel, an analyst at Nomura. “Meanwhile, we are still in a historically low interest-rate environment, so for a company, now is a good time to lock in long-term funding.”
China Resources Power did exactly that when it priced a $750 million perpetual non-call-five late last night, gathering a $4 billion order book. As was expected, private banks played a crucial role, buying more than 60% of the deal, though there was a fair bit of participation from fund managers, which took a quarter of the deal.
The bonds priced at 7.25%, which was at the tight end of the final guidance: 7.375% plus or minus 0.125%. The company also raised the maximum amount expected.
The hybrid priced at par and offered a spread of 524.3bp over five-year US Treasuries. Citi, Goldman Sachs and UBS were joint bookrunners. UBS was added as a bookrunner at the last minute, shortly before the deal was launched.
The perpetual is rated Ba2 by Moody’s and BB by Standard & Poor’s, three notches below the issuer’s Baa2/BBB rating. It is one of the few rated Asian corporate hybrids.
The perp offered a pick-up of about 250bp over what a new five-year China Resources Power senior bond would have paid. The coupon is fixed at 7.25% for the first five years. It resets to a fixed-rate bond from the fifth to 10th year at 524.3bp over the then prevailing five-year Treasuries. There is a 100bp step-up in the 10th year and the bonds will reset to a fixed-rate note that pays 624.3bp over five-year US Treasuries.
In terms of structure, China Resources Power’s hybrid is callable every five years, which is slightly different to Citic Pacific’s hybrid.
“Unlike Citic Pacific, which was callable at every coupon date after year 10, China Resources is callable every five years,” said Jacob Samuel, an analyst at Nomura. “This could potentially convince investors to look at it as a 10-year bond on the basis that the issuer is likely to call the bonds at year 10, rather than have to wait for another five years.”
The issuer has the option to defer coupons subject to a dividend pusher with a six-month look-back period as well as a dividend stopper. The hybrid is expected to receive 50% equity treatment by the rating agencies.
The company has a substantial amount of short-term debt that is due for refinancing as well as capital expenditure requirements and, according to Samuel, could tap the debt markets again in the near future.
ICTSI
ICTSI last night priced its $200 million perpetual non-call-five bond. The notes priced at 8.375%, at the tight end of the 8.375% to 8.5% final guidance and inside the initial guidance, which was in the area of 8.5%. The perpetuals yielded a spread of 637.8bp over five-year Treasuries and the notes priced at par. Citi and HSBC were joint bookrunners.
The deal gathered an order book of $800 million from more than 90 accounts. Asian investors bought 73% of the deal and European investors bought the rest. Private banks bought 54% of the deal, while fund managers bought 34% and banks 12%.
The coupon is fixed at 8.375% for the first 10 years. There is no reset at the fifth year, unlike most other hybrids. But after the 10th year, the coupon will reset to 637.8bp over the then prevailing five-year Treasuries, plus a 250bp step up, which is much higher compared to the typical 100bp step-up seen in recent deals. Thereafter, the coupon resets over the prevailing five-year Treasuries every five years.
Another unique feature is that, within the first year, ICTSI has the option to convert the perpetual to a senior bullet that matures in the 10th year. If it decides to convert the bond, the distribution rate will step down by 62.5bp. There is a call at par in the fifth and 10th year and any distribution payment date thereafter.
There is a step up of 500bp if control of the company changes, meaning that the Razon family ceases to control more than 50% of ICTSI. There is a dividend pusher with a six-month look-back period as well as a dividend stopper. The proceeds will be used for the development of greenfield projects and potential acquisitions.
Elsewhere, the debt pipeline continues to build relentlessly. Thailand’s lender Siam Commercial Bank has mandated Barclays Capital and Deutsche Bank for its Reg-S five-year bond to raise $300 million to $500 million. Roadshows will start next week.
Hong Kong-listed Beijing Enterprises has mandated Bank of America Merrill Lynch, HSBC and Morgan Stanley as global coordinators and bookrunnners for its proposed issue of senior bonds. Credit Suisse and UBS are also joint bookrunners.
