Having started roadshows with the intention of pricing a $300 million 10 year deal at a 10bp to 15bp premium to Hutchison Whampoa, Hong Kong Land has ended them with a $600 million deal 4bp through Hutch and without a new issue premium. For those who doubted the wisdom or veracity of opting for such an aggressive benchmark, a final order book just shy of $2.5 billion would seem to suggest otherwise.
Relative to initial issue size, Hong Kong Land has attracted the largest order book so far this year, with the transaction closing yesterday (Wednesday), eight times oversubscribed. Led by Goldman Sachs, HSBC and JPMorgan, the A-/A3 rated credit priced its deal at New York's open on an issue price of 99.054 and coupon of 7% to yield 7.134%, or 195bp over Treasuries.
This represented the tightest end of official price talk at the 195bp to 200bp level. Within half an hour of secondary trading, the deal had also tightened in to a bid/offer spread of 191bp/188bp, a 9bp differential to Hutchison Whampoa's 7% 2011 bond, which was bid at 199bp over at the time of pricing.
The reason why the company was able to price through its rival despite a one notch lower rater from Standard & Poor's is twofold. Firstly it has rarity value for the huge home audience that has underpinned every single international debt issue from Asia this year. And secondly, it appears to have succeeded in convincing investors to view it as a utility style credit, which can withstand lower debt ratios than a traditional property developer.
The stability and predictability of the company's cash flows deriving from a flagship property portfolio that carries the world's most expensive address make it a perfect candidate for debt and conversely, an unexciting equity prospect. Consequently, it is comfortably able to maintain an EBITDA to gross interest coverage ratio of only 2.6 times in 2000 and a total debt to EBITDA ratio of 5.4 times. Debt to capitalisation, by contrast, is extremely healthy at 19.8% in 2000.
Observers comment that a total of 150 tickets were filled, with an average allocation of about 25% of orders placed. Allocations were split 61% Asia, 26% Europe and 13% US. For US investors expecting a new issue premium to Hutchison, the leads would have tried to be particularly careful to avoid filling orders that would be flipped for a quick profit in early secondary market trading.
However, since a number of bank investors are said to have been unable to get lines in place in time for primary placement, there is expected to be plenty of follow-on demand for those bonds that do flow back. Indeed, Asian demand accounted for $1.5 billion of the $2.5 billion total.
Yet as one investor comments, "We were told that there wasn't any price tension in the book at all. When the leads went out with official price talk a day before pricing, no orders were lost any and a whole lot more from the US were gained. "
By investor type, demand is said to have been wide-ranging, encompassing insurance companies, corporates, asset managers, banks and private bank funds. In a pattern familiar to every debt deal this year, private banking demand is said to have been enormous.
“Retail investors see this deal as a bit of a no-brainer,” says one observer. “There’s a lot of cash available for good quality credits. This one has steady earnings from a property portfolio with consistently high occupancy levels around the 97% mark. It’s also on positive outlook, has never issued in the bond markets before, yet is nevertheless an extremely well know face to local investors.”
A second comments, “It’s quite evident that retail investors are re-allocating away from equity and into debt. And there’s no doubt that it has been an enormous boon to the deal.”
For Hong Kong Land, the company has been able to term out its liability profile at a very marginal pick-up to the normally cost efficient bank market. The company recently completed a $6.38 billion ($820 million) revolving credit facility with five and seven year tranches. The longer of the two was priced at an equivalent Libor spread of roughly 55bp over and in Treasury terms, 135bp over.
Proceeds from the deal will be used to repay secured debt, which accounted for $427 million of the company’s $1.241 billion total liabilities as of December 2000. Its high percentage of secured indebtedness was one factor highlighted by Moody’s as a slight drag on the company’s rating. Most of Hong Kong Land’s debt is also short-term in nature, with 26% falling below one year, 35% one to two years and 39% two to five years.
