Hong Kong-listed conglomerate Citic Pacific successfully priced a heavily subscribed dual-tranche $750 million hybrid and $500 million 10-year senior note on Friday night. The deal marked Citic Pacific’s return to the public debt capital markets after a decade-long absence.
It was also the first dollar-denominated corporate hybrid this year and, depending on how it fares in secondary trading, could re-open the market after a hiatus of sorts. Corporate hybrid issuance came to a halt last year after perpetual bonds from Noble Group and Cheung Kong Infrastructure traded poorly in the aftermarket and investors lost money.
“It’s tough to say whether the market for perpetual bonds is back. Citic Pacific has government backing with a coupon reset every five years and that could be one of the reasons why investors are buying it,” said Jacob Samuel, an analyst at Nomura. “If rates start to rise, it will become difficult for issuers to lock in long-term funding at low rates and that may discourage them from issuing perps,” he added.
Citic Pacific’s hybrid issue, like previous ones, won strong supported from private banks. HSBC and UBS were joint bookrunners and both banks were said to be on the deal thanks in part to their strong private banking networks and also because they worked closely with the rating agencies.
Both tranches were announced concurrently on Wednesday, but the leads went out with a whisper on the hybrid first, to build momentum for that tranche. The strong momentum of the hybrid allowed the leads to shorten the bookbuilding process for the senior bond, which benefited from spill-over demand. The parameters of both tranches were finalised on Friday when they were priced concurrently.
Initial price whispers on the perpetual non-call-five were at low- to mid-8%. This was tightened to 8% to 8.25% and further tightened to 7.875% to 8%. Eventually, the bonds priced at a yield of 7.875%, at the tight end, offering a spread of 554.5bp over Treasuries. The leads telegraphed to investors that the size of the hybrid would be capped at $750 million, which was where it eventually came.
The deal gathered a total book of $8.5 billion from 165 accounts, heavily supported by private banks, which bought 56%. UBS Wealth Management alone contributed about $1 billion to the hybrid’s order book, making it the largest order. Fund managers bought 38%, banks 5% and corporates/others 1%. Asian investors bought 84% and European investors bought 16%.
The 10-year senior bond priced at a yield of 6.625%, at the tight end of the 6.625% to 6.75% final guidance. The initial guidance was in the area of 6.75%.
The senior bond gathered an order book of $3.3 billion from 175 accounts. In contrast to the hybrid, the book was dominated by fund managers, which bought 66% of the deal. Private banks bought 19%, banks 8% and insurance 4%. Asian investors bought 66%, European 26% and offshore US accounts 8%.
Citic’s senior bonds are rated investment grade at BBB- by S&P and sub-investment grade at Ba1 by Moody’s. The perpetual is unrated. The rating agencies are treating half the perpetuals as equity and the other 50% as debt.
The yield differential between Citic Pacific’s senior bond and hybrid was about 125bp. In comparison, the yield differential between Hutch’s senior bond due 2015 and its hybrid was about 220bp. In light of that, Citic Pacific’s senior bond was attractively priced to some, while the valuations on the hybrid were rich.
“I’d say that Citic’s senior bond looks more attractive. It is an investment-grade issue with a maturity and it is straightforward to understand,” said one fund manager.
However, according to one person familiar with the deal, Citic Pacific’s senior bond matures in 2021 whereas Hutch’s matures in 2015. Theoretically, he added, the yield differential between a new Hutch senior bond due 2021 and a new hybrid would be about 150bp.
Investor-friendly structure
Citic Pacific’s perpetual was designed to be investor friendly. Its structure was similar to Hutchison Whampoa’s perpetual, which priced last year, though there were a few differences.
The coupon for Citic Pacific’s perpetual resets every five years. A spread of 554.5bp will be added to the then prevailing five-year US Treasury yield to calculate the new coupon payable.
Unlike the Hutch deal, which resets from a fixed-rate bond to a floater, Citic Pacific’s perpetual will reset to a fixed-rate note. The deal was structured this way as private banks, which constituted a big part of the book, were more comfortable holding a fixed-rate bond.
From the tenth year onwards, there is a 100bp step up, which means that a spread of 654.5bp will be added to the prevailing five-year US Treasury yield. The bonds are callable at the fifth and 10th year, and at every distribution date thereafter.
Citic Pacific has the option to defer a coupon and its deferrals are cumulative. However, there are features in place to discourage it from deferring coupons.
There is a dividend pusher, which means that Citic Pacific will have to pay a coupon to bondholders if it has paid dividends to shareholders during the six months before its distribution date. In contrast, Hutch had to pay a coupon to bondholders if it had paid dividends within three months of the distribution date.
Citic Pacific hybrid’s also has a dividend stopper, which means that it will not be able to pay dividends to shareholders if it has not paid bondholders any coupon. The company has paid out dividends to shareholders regularly during the past few years.
The company also faced tighter rules imposed by the ratings agency earlier this year. On March 17, Standard & Poor’s tightened guidelines when it stated that the replacement capital covenant will be in force from issuance. It was previously in force after the first call date. The intention behind the tighter guidelines was to ensure that hybrid issues are permanent in nature.
Under the revised guidelines, if Citic Pacific decides to call its bonds, it is legally obliged to replace it with a new issue that has a similar equity content. However, there are certain carve outs — for example, if an event takes place to improve the issuers’ credit quality and the hybrid is no longer needed to support ratings. In Citic’s Pacific’s case, it would also need to improve some ratios, including bringing its debt-to-capital ratio down below 45%.
Citic Pacific is incorporated in Hong Kong with major businesses within steel manufacturing, iron ore mining and property development in mainland China. Citic Group, which is wholly owned by the State Council of the PRC, is the controlling shareholder of Citic Pacific, with a 57.56% stake.
