The Hong Kong and China Gas Company, known as Towngas, raised a $300 million perpetual non-call five hybrid note on Tuesday – its first ever perp – attracting high-quality investors and potentially opening up the market for more to come in the future.
The rarity and relatively small size of the transaction meant there was not enough paper to go around, according to sources. This, combined with an expected high-quality rating of A3 and A- from Moody’s and Standard & Poor’s, had investors clamouring for the notes.
“The transaction was only $300 million, and it’s [one of] the highest grade perpetuals in Asia,” said a source close to the deal. “For such a strong name, we got very strong inquiries for it.”
As a result, Towngas was able to attract an order book of $1.8 billion from more than 100 accounts, according to a term sheet. Asian investors were allocated 80% of the notes, while the rest went to European investors.
Fund managers subscribed to a bulk of the paper, accounting for 54%, followed by central banks and sovereign wealth funds with 15%, private banks 15%, financial institutions 8%, insurance 6% and others 2%. In secondary markets, Towngas notes traded up one point above par.
Singapore Post, which has a rating of A+ from S&P, was the last issuer to have sold such a highly-rated perpetual above the size of $200 million, according to Dealogic data. This was back in 2012.
Pricing
Towngas’ non-call five perpetual priced at the tighter end of the final guidance of 4.75% to 4.875%, which is also 25bp tighter than its initial price guidance. However, sources highlighted that it was difficult to find comparables due to the fact that the Asian hybrid market is so nascent.
“It’s difficult to have any close comparables because there haven’t been any recent high-grade perpetuals that have come to market,” said the source. “I hope we will see more structures like this being marketed, because there is a strong demand for it.”
The closest comparable was Hutchinson Whampoa’s existing non-call five perpetual issued in 2012, which was trading around the sub-4% levels at the time of pricing. After adjusting for fair value, the source notes that new issues should come around the low-4% area.
In 2013, there were only 32 perpetuals priced with volumes touching $10.7 billion in Asia ex-Japan – a marginal improvement from 2012’s 31 deals which recorded higher volumes of $12 billion, according to Dealogic data.
Towngas’ perp structure
In Towngas’ deal, the company has opted for a staggered step-up or “cliff structure”, similar to the structures used by Hutch, Li & Fung and Agile Properties. There is a 25bp step-up from the tenth year and an additional 75bp from the 25-year.
The issue gets an expected equity credit of 50% from Moody’s and S&P but the latter’s equity credit falls away after five years, which investors view as a strong incentive for Towngas to call the bonds. Additionally, the transaction is anticipated to get 100% equity credit from the Hong Kong Financial Reporting Standards (HKFRS), according to the term sheet.
The hybrid has fixed coupon payments for the first five years at the initial distribution rate of 4.75%. It then resets in the fifth year and every six months thereafter at prevailing six-month US dollar Libor plus initial spread and a step-up.
HSBC, JPMorgan, and Morgan Stanley were the joint bookrunners of Towngas’ transaction.
