Hutchison Whampoa showed a return to form yesterday (Tuesday) with a successful re-opening of its February 2013 bond. The $1 billion deal not only represents Asia's largest ever re-opening, but also now becomes the biggest single tranche issue traded in the Asian market. At a total issue size of $2.5 billion, it just pips an outstanding $2 billion bond by Petronas.
On a global basis it is extremely rare to see a corporate borrower attempt a tap of such a large size and the A3/A rated group has won many plaudits for its timing and strategy. As one Asian DCM head puts it, "What better way to underline your market access than to do so when the war in Iraq means there's virtually no international activity and everyone assumes SARS in on the verge of shutting Hong Kong down."
Market practitioners further believe the group has got much more aggressive pricing than it did in February when it miscalculated its timing and needed certainty of execution. Having hit a bid by Merrill Lynch during a particularly volatile patch caused by PCCW's abortive bid for Cable & Wireless, the group ended up ceding $28.35 million to the lead manager after the market suddenly snapped back and Merrill's had a very lucrative bought deal on its hands.
The new deal is, nevertheless, viewed as a good result for lead manager Goldman Sachs, which has once more re-affirmed its close relationship with Hutch and moved up to the second spot behind Merrill's in the Asian league tables. And for once, there is meaning to bankers' oft repeated, but rarely credible, motto of doing deals for the client and not for the fees. In this case, investors say the deal was bought outright around the 255bp level, with Goldman believed to have received a very "token" amount for its efforts.
However, rumours that the lead was long about $300 million of bonds have been dismissed out of hand. Instead, it is said the order book was closed early to avoid undue market risk, but only once it had topped the $1 billion mark. Pricing came at 100.88% to yield 6.38% or 255bp over Treasuries.
This level equated to a very marginal 2bp premium to secondary market levels, since the 2013 bond was bid at 253bp when the re-opening priced early afternoon New York time. Compared to trading spreads late last week before news of the deal became known, pricing was also only 8bp over bid levels.
On a libor basis, it is even more expensive. Hutch recently set itself libor funding targets of 210bp to 215bp over for 10-year money. The new deal is said to have come at roughly 206bp over and only 2bp above the libor levels of Hutch's 2011 bond, which has a two-year shorter maturity.
The differential can be explained by the fact that the Treasury curve is very steep between eight and 10-years. For this reason, the new deal may represent good value for yield investors as it has been priced at a 50bp premium to the 2011 bond and widened out to a 60bp premium during secondary trading. The original 2013 deal was also priced at a 50bp premium, but 20bp of this was attributed to a new issue premium and the company's credit curve has never flattened to reflect this point.
Goldman is said to have begun the process of winning the deal the moment Hutch announced better than expected 2002 results. The next day, it hosted an investor breakfast briefing during which group finance director Frank Sixt outlined the company's credit strategy.
Investors, which had not participated in the 2013 bond, were said to have had their interest piqued. This in turn, enabled Goldman to build a shadow order book and give it confidence in the pricing levels it would subsequently bid to the client.
The investment bank would need it since a bid around the 255bp area left little room for manoeuvre given that Asian bonds typically widen at least 10bp on rumours of fresh supply. However, the vagueness of its deal announcement was an astute market move. With most investors assuming a tap of $500 million, the bank could progressively lift the deal to $1 billion as the book built, rather than spook investors at the outset with the threat of too much paper.
After officially opening for orders at noon Asian time Monday, the book was said to have been passed to London with nearly $800 million orders, at which point the offer size was increased to $750 million, then $1 billion as the book moved on to New York. However, after Treasuries began to stage a strong rally, it was decided to close the deal at midnight Asian time, for fear of losing yield sensitive Asian investors. At this point, there are said to have been $1.2 billion in orders.
Allocations to nearly 100 investors show a split of 50% Asia, 30% US and 20% Europe. Unexpectedly there was not a particularly strong showing from Asian private banking clients and this has been partly attributed to the SARS effect. Instead Asia is said to have been dominated by bank investors and the US by portfolio managers. Around five investors placed orders in excess of $50 million and nearly 15 for $20 million.
The deal's one weak point has been its initial secondary market trading performance, with spreads widening 8bp to Asia's close Tuesday. Partly this can be explained by fresh supply.
Also some bankers believe there was significant flow-back after investors received larger than anticipated allocations. Having watched Merrill Lynch amass an order book of $4.5 billion in February, many accounts may have assumed Goldman would follow a similar tack and they needed to put in big orders or get scaled back.
From Hutch's perspective, the new deal is likely to be viewed as a great success. Advantageous Treasury movements since February, mean that it was able to price the new deal at cheaper absolute levels. In February, for example, it offered a 6.564% yield, equating to 260bp over Treasuries.
It has also now significantly lessened re-financing risk. Having raised a total of $2.98 billion - $2.5 billion from the two dollar bonds and A$800 million for Hutch Telecom Australia, the group has fully dealt with the $3 billion coming due in 2003. At the start of the year, Hutchison had 66% of its $23.2 billion debt falling due within a four-year timeframe. That level is now down to roughly 50%, with $3.9 billion due in 2004 and $3.7 billion in 2005.
Some credit analysts consequently argue that Hutch's credit profile has stabilized. While conceding that debt protection measures will weaken over the course of 2003, they note that this will be much less than market participants were predicting.
A recent announcement that 3G capex will be cut by Eu4 billion means Hutch will have less need to draw down available bank lines. Yet, as some analysts re-iterate, Hutch's 3G plans are already fully funded and, therefore, the main risk lies with the extent to which additional gearing puts pressure on the group's capital structure.
The group's gross debt to capitalization finished 2002 at 44.4% and analysts predict it will hit 50% by year-end. However, as the group is always keen to point out, its cash and cash equivalents amounting to roughly $16.7 billion, means that net debt to capitalization is a more modest 18%.
