Hutchison Whampoa created the largest dollar bond in Asian history yesterday (Tuesday) on the completion of a second tap of its February 2013 bond. The $1 billion re-opening now brings the overall deal size up to $3.5 billion, easily surpassing the Republic of Korea's $3 billion issue due 2008.
Led by HSBC, the re-opening was pre-marketed at 230bp to 232bp over Treasuries and priced early New York afternoon at 104.115% to yield 5.936% or 230bp over Treasuries. At this level, the new deal came within the bid/offer spread of the old one - trading at 231bp/228bp at the time of pricing.
This pushes pricing even tighter than the first $1 billion re-opening in early April, which came at a marginal 2bp premium to secondary market bid levels. With Goldman Sachs as lead manager, pricing was completed at a yield 6.38% or 255bp over Treasuries.
The main difference between the two is that the latest re-opening had to battle against a far more volatile secondary market backdrop, with the 2013 widening almost 18bp in the space of a day. Having closed Asian trading Monday at 218bp bid, it went out as far as 236bp during Asia's afternoon Tuesday, before settling back in the low 230bp level as New York opened.
At least 10bp of widening is normally expected as news of fresh supply breaks. The additional softness in this instance has been attributed to increased selling pressure from rival banks and an investor community irked by a credit, which had promised there would be no new fund raising.
Where credibility issues are concerned, an obvious comparison is PCCW, which let its opportunistic instincts get the better of a desire to establish a long-term relationship with investors in November 2001. Having successfully completed a re-opening and categorically stated it would not return to the market for at least six months, the borrower was back with plans for issues in sterling and euros before the trade had even reached its settlement date.
Similarly, investors recall Hutch officials saying the April tap would be the last for the foreseeable future. They were told the group intended to use its abundant cash reserves to re-pay 2004 maturities and that this would have the additional benefit of bringing down overall debt levels.
Yet a new deal has come out just as the last tap becomes fungible with the original $1.5 billion deal of mid February. "This is a company with a split personality," one specialist argues. "It has its strategic side, represented by long-term investments in steady reliable businesses such as ports and utilities. Then there's the trading side, represented by opportunistic forays into ventures like Global Crossing and 3G. This bond deal is a clear example of the trading side being dominant. It'll get away with it this time, but if it continues to behave in this manner it will severely dent its reputation."
Most bankers agree that Hutch found the temptation of taking advantage of strong market conditions just too hard to pass up. And it succeeded in breaking the 6% mark in terms of yield and 200bp on a Libor basis, since the deal swaps back to about 198bp over.
The strong technicals underpinning the Asian market for the past month are clearly evident in the deal's distribution pattern. There are a similar number of investors to the last tap - 97 compared to 100 before. But the geographical split is more heavily skewed to the US this time round - 50% US, 30% Asia, 20% Europe against 50% Asia, 30% US, 20% Europe in April.
Bankers say this is because Asia is attracting American yield driven buyers and momentum players chasing the spread compression, which initially lagged Europe and the US. In relative value terms, Hutchison is also viewed as a good buy compared to weak, single-A US industrial credits trading around the 60bp to 80bp mark. E&P company Apache, for example, has a one notch lower rating than Hutch on the S&P side and recently priced a 12-year deal at 75bp over Treasuries.
Asian private banking also played a part, but less than some had been expecting. Bankers estimate that only 15% of the Asian book came from private clients. Very preliminary figures suggest that fund managers accounted for about 60% of the overall book, banks 25% to 28%, insurance companies 7%, private banking about 5% and the remainder corporates.
There was said to be one order over $100 million and about eight over $50 million. Together they accounted for the half the size of a deal, which closed with an order book of $1.4 billion. The book officially opened at lunchtime Tuesday in Asia, though HSBC is reported to have soft-circled orders of about $275 million in the US the previous night.
The main challenge for the lead was convincing investors that spread widening ahead of pricing was just a temporary blip. "Two weeks ago, the 2013 had tightened in to about 205bp, but since then there's been some profit taking, which has pushed it back to 218bp again," says one banker. "But accounts now feel it's time to re-engage. This deal offered a good opportunity to participate in a very liquid benchmark."
Indeed, analysts report that over the last few weeks investors have asked virtually no questions about credit fundamentals and the slow take-up of 3G. Instead, most have been solely focused on market dynamics and the likelihood of continued spread tightening.
For many competitor banks, the chief question was where HSBC bought the deal. The bank says it did provide some level of underwriting support, but refuses to be drawn on whether it bought the deal at 232bp over Treasuries, or backstopped it at this level. It did, however, make some additional fees - 30bp.
And it has also broken its duck with one of its most important and valued clients. Despite being the most active lead manager of international bonds for Hong Kong credits over a number of years, HSBC has never before completed a deal for Hutch.
For Hutch itself, the new deal is not only cost effective, but will further help mitigate 2004 re-financing risk and should, therefore, provide a more stable platform for spread performance over the second half of the year. As a result of its two previous dollar deals and a third denominated in Australian dollars, the company has dealt with the $3 billion coming due in 2003. In 2004, another $3.9 billion matures.
In a research report published yesterday, UBS Warburg concludes that a successful deal may spare Hutch a downgrade from A to A- by Standard & Poors. It writes, "Hutch's increased financial flexibility and demonstrated access to capital could modify S&P's view on the mid single-A rating and persuade the agency to allow more time for assessment of the rating direction."
