Ever keen that any of its deals be viewed as an unequivocal success, Hutchison also made a strategic decision to abandon plans for a 30-year tranche after investors failed to deliver the pricing levels it wanted and the overall market for longer-dated paper deteriorated slightly after roadshows got underway. What it did achieve via its three bookrunners - Goldman Sachs, JP Morgan and Merrill Lynch - was to price flat to outstanding paper on a like-for-like basis and dispense with the need for a new issue premium.
For a company which has, in current parlance, been negatively tainted by its telecommunications exposure, this was a remarkable feat and the more so because the deal came inside the current trading levels of both the single-A telecommunications curve and benchmark US corporate curve.
Merrill Lynch's Rick Stoddard comments: "A lot of telecommunications companies have been coming to the market because they need the money. Hutchison was not in this position and, therefore, returned from a position of strength. This enabled it to price a very attractive deal for itself and yet maintain a very high quality global order book."
Goldman Sachs' Ron Lee further highlights: "Behind the hard quantifiable triumph the group has made in terms of size and price, lies an even more important and wider achievement. Hutchison has used this transaction as a platform to deliver a greater understanding of what it is really about.
"On a macro level," he continues, "Hong Kong is a very different place now to what it was when Hutch did its last $2 billion four tranche deal at the time of the handover. The company itself has also changed a great deal in the interim period. This is like a second coming out for them and they wanted and have made sure that they executed it perfectly."
Priced in New York Tuesday, the 2010 issue came at 99.766 with a semi-annual coupon of 7% to yield 7.033%, equating to a launch spread of 187.5bp over Treasuries at the very tight end of the pre-marketed range. Early distribution figures show that about 50% of the 200 strong order book went to Asia, 30% to the US, and the remaining 20% to Europe.
Demand was said to be very widely spread, with only a handful of truly jumbo orders over the $150 million mark and plenty of demand from retail investors, particularly in Hong Kong. In total, the book was said to have closed around the $3 billion mark.
"We were all exceptionally pleased with the pricing levels achieved," says JP Morgan's Asian syndicate head Marc Lewell. "This can be attributed to a highly successful roadshow that underlined Hutch's standing as a truly diversified corporate with highly reputable cash flows."
At 187.5bp, the deal came flat to the implied level of a new 10-year bond. At the time of pricing, the group's existing 2007 issue was bid at 185bp over five-year Treasuries. Bankers believe that this equates to about 175bp over an interpolated curve and add a further 4bp per annum to make the jump from seven to 10 years. A second benchmark used by investors comprised the group's 2037 bond puttable in 2009, which has recently traded around the 195bp level.
By comparison, other single A telco credits, with the exception of Vodafone, are trading at much wider levels. Deutsche Telekom, for example, has an outstanding 10-year at 255bp over Treasuries, while British Telecom is quoted at 265bp over and Vodafone at 180bp over. From the wider single A corporate sector, benchmark credits such as Ford Motor have 10-year paper at 215bp over, with DaimlerChrysler at 284bp and General Motors at 192bp.
In terms of secondary spread differentials between 10- and 30-year paper, most credits tend to trade in a 10bp to 30bp band. Deutsche Telekom, for instance, has a 30-year at 280bp over Treasuries, a 25bp differential to its 10-year. So too, British Telecom at 290bp over on a 30-year is also trading at a 25bp differential and Vodafone at 195bp, on a 15bp differential. Hutch, on the other hand, has seen its 2027 recently trade between 225bp to 230bp, a 40bp to 45bp differential to its 10-year paper. Prior to this, the 2027 had even traded out as wide as 260bp over, an 80bp differential.
Observers report that while the group was prepared to accept pricing of a 30-year tranche at a 35bp to 40bp differential to its new 10-year, it was not willing to accept the 55bp to 60bp level demanded by investors, particularly in the US. "Surprisingly, there was quite a lot of demand for 30-year paper out of Asia," one banker comments, "but it wasn't enough to act as a price driver and US investors wanted the kind of wider price differential that has recently been seen on other new twin tranche 10- and 30-year issues."
And as UBS Warburg's head of Asian credit research Stephen Cheng explains: "Clearly the issue for investors was one of value. The price on Hutch's 2027s didn't really move for about six months and then suddenly it came down about 30bp to 40bp in the run up to the new deal. The recent flattening of the group's credit curve has understandably made investors cautious about the potential for further upside.
"With concerns increasing again about the direction of the US economy, investors are now also looking for liquidity, which is not something normally associated with the long end of the corporate credit curve. They feel they need to be defensive in this environment and this is what Hutch delivered."
Part of the group's rationale for accessing the market was indeed said to be its fear of where the markets might head later in the year. "Hutchison has shown time and time again that it is a savvy and extremely shrewd borrower that's willing to seize market opportunities as soon as they present themselves," Goldman's Lee asserts. "They've timed the market incredibly well."
Pricing of the deal also caught upward momentum generated by Standard & Poor's lifting of Hong Kong's credit ceiling to A+ from A. Benchmark semi-sovereign credits such as the Mass Transit Railway Corp (MTR) and Kowloon Canton Railway Corporation (KCRC) have been the major beneficiaries and are currently trading at extremely tight levels relative to comparable global benchmarks. The former's 2010 bond, for example, is currently bid at 145bp over Treasuries, although bankers doubt whether it would be able to print $1.5 billion of new paper at these levels.
Having traditionally traded about 10bp to 15bp back from MTR and KCR, Hutch has progressively moved out to a 40bp level since it was put on Creditwatch last year and then moved to negative outlook by both agencies in May. The fact that the group was not lifted in tandem with its former peers draws the ire of the group's relationship bankers. They now hope that Standard & Poor's will be swayed by the group's roadshow data when it makes its annual review in a couple of weeks.
"Frankly, we think that both agencies' attitude verges on the irresponsible," says one industry specialist. "They have based their credit outlook on what they think might happen, not on what Hutch has done, contemplated doing, or is still thinking about doing."
In particular, this centres on the costs associated with rolling out the group's 3G licences in its four designated European countries - Britain, Italy, Austria and Sweden - and the negative operating cash flows that will result. Consequently, the twin aim of the group's global roadshow was firstly to underline that the company is much more than a telco and, secondly, to show that it has costs from its 3G expansion under control.
"Rather than milking its other businesses to fund its telecommunications expansion, Hutch is taking the excess cash from its telecom ventures to fund the other businesses," one banker explains. "It estimates that once the costs of the 3G licences are taken into account, followed by the capital expenditure needed for built-out and the negative cash flows that will ensure, it will still be $15 billion cash positive from the sale of its 2G ventures."
So too, the company emphasized that its current funding exercise is not a means of raising new debt, but terming out its existing $18.55 billion debt by paying down bank loans which fall due over the next two years. These include two syndicated loans for respectively HK$12 billion ($1.54 billion) and $1.5 billion due over 2002 and 2003
During roadshows, officials stated that the company has a net cash position of roughly $9 billion, once debt is deducted from the company's $28 billion cash pile. This latter amount comprises some $8.5 billion in liquid funds, a figure that rises to $12.5 billion once managed funds and the company's small equity shareholdings are taken into consideration. On top of this, the group also has a roughly $7 billion stake in Voicestream, a $3 billion stake in Vodafone and a further $5.5 billion stake in the UK wireless operator backing its two exchangeable bonds.
"The intellectual integrity of the agencies' position is being steadily eroded," one observer concludes. "The roadshow and success of the deal that followed it has highlighted this fact very succinctly. Time will make the position even less tenable."
