PCCW-HKT zoomed in and out of the international bond markets yesterday (July 14) with a $500 million 10-year issue led by HSBC. In doing so, the Baa2/BBB/BBB+ rated credit followed a very similar strategy to 2003 when it also raised $500 million via an accelerated bookbuild under the auspices of the same lead manager.
This time round the lead shortened the marketing period from 24 hours to 12 and priced the deal around New York's close after closing the book a few hours earlier. Based on an issue price of 99.142% and coupon of 5.25%, the deal had a launch yield of 5.362% equating to 120bp over Treasuries or 78bp over Libor.
Fees were 40bp, slightly lower than the 47.5bp PCCW-HKT paid in 2003, though considerably higher than most other Asian credits are willing to offer. What level of risk HSBC was prepared to take in terms of back-stopping the deal remains unclear.
The new bond's main benchmark was PCCW-HKT's outstanding 6% July 2013 deal. One week ago, this was trading around 114bp over Treasuries, but had tightened in line with the whole Asian market to around the 109bp level at the time the new issue was announced. By the time it priced, it was bid about 110bp over.
On a Libor basis, the deal is said to have been trading around 68bp over. This means that the new deal has priced 10bp over the old in return for a two-year pick up.
This could be considered aggressive given there is a 12bp pick-up between the group's 2011 and 2013 deals. However, the group attracted a very healthy order book of $1.3 billion, with participation by 67 accounts.
By geography, the book had a split of 49% US, 27% Europe and 23% Asia. By investor type, fund managers took 51%, banks 26%, hedge funds 9%, insurers 8%, corporates 4% and private banks 2%.
Some fixed income analysts have queried why the group is raising new debt given it has no obvious fund raising need and has been in de-leveraging mode for the last few years. Indeed, it has long hoped to gain a ratings upgrade from at least one of the agencies - it has been on positive outlook from S&P since its last deal.
During an investor conference call, CFO Alex Arena said that proceeds are being to used to re-finance debt. He commented that the group has recently pre-paid $250 million of a 2031 callable Yen deal and has a $1.1 billion convertible coming due in December.
And while he did not categorically say the group will not access the markets again this year, observers had the impression this will be the case. "If you look at PCCW-HKT's recent fundraising history, they've tended to come for $500 million bite size chunks in any one year," says one observer.
The group also still has quite a lot of cash on hand including $1 billion from China Netcom's as a result of its purchase of a 20% stake at the beginning of the year. Analysts calculate that the group currently maintains a debt to EBITDA ratio of 3.3 times and has gross consolidated debt of $2.9 billion at the operating company level.
The deal appears well timed and during its first day trading yesterday stayed firm around the 120bp level. "The came now because they like their current spread levels, they like current Treasury levels and they didn't want to wait and see what the markets are like after the summer," one observer concluded.
