Priced by lead managers Merrill Lynch and Morgan Stanley on Friday, a debut $200 million bond offering by Hysan Development has been successfully positioned within Hong Kong's growing credit universe.
"It was all about price in the end," says one banker. "The key comparison was with Hongkong Land and the premium that Hysan would need to pay for running a property portfolio in a different neighbourhood."
The difference between a property portfolio in Causeway Bay with an occupancy rate in the 80% range and revenue of HK$1.4 billion per annum against one in Central, with an occupancy rate of 94% and HK$2.9 billion per annum in revenue, was deemed to be about 20bp to 25bp, taking into account a 10bp new issue premium. Launched off Hysan's recently established $1 billion MTN programme, a 10-year deal was consequently priced at 99.858% with a coupon of 7% to yield 7.02% or 200bp over Treasuries. Co-managers were Deutsche Bank and UBS Warburg.
Observers report an overall order book of $350 million, with participation from about 50 accounts. Of this number two-thirds came from Asia and one-third from Europe, with a split that saw 40% of paper placed with institutional money managers, 30% with retail and 30% with financial institutions.
Hysan's view of a successful deal was said to come down to the investor breakdown it could achieve and observers say the company was particularly determined not to place paper with its relationship banks. Hence, when initial price guidance at 185bp over Treasuries was deemed tight by many Asian market participants, the company widened it slightly to make sure that it captured a different investor base.
"In the Asian loan market, some banks are offering BBB-rated credits like Hysan 50bp over Hibor (30bp over Libor) for seven-year and sometimes even eight-year paper," one banker comments. "What would be the point of paying the pick-up to complete a bond deal just to place it with these same banks? Hysan could have easily completed a deal at 190bp over Treasuries, but the book would have had a completely different composition to the one it ended up with."
Alongside widening its investor base, the company also wanted to extend its maturity profile and repay bank loans coming due in 2002. To the end of June 2001, Hysan had total debt of HK$5.4 billion ($694 million), of which the majority is Hong Kong dollar-denominated and about 45% floating rate.
With a BBB+/Baa1 rating, the group sits one notch below Hongkong Land's A-/A3 rating and similar to the latter, has large recurring cash flows from its rental income that make it a perfect utility-style play for bond investors. Says HSBC analyst, Sabita Mehra, "Its modest capital expenditure plans should continue to underpin it moderate capital structure, underpinning stability in cash flows at least until 2003 to 2004, at which time the company is expected to embark on its major redevelopment projects."
Both Hongkong Land and Hysan have similar debt ratios, with the former running a net debt to EBITDA ratio of 5.5 times for the first half of 2001 versus a 4.7 level for the latter. Debt to capitalisation at both companies is low, with Hysan standing at 18% and Hongkong Land 19.8%.
At the time of pricing, Hongkong Land's 7% May 2011 bond was trading at a bid/offer spread of 165bp/155bp, while BBB+/Baa1-rated Jardine Strategic Development's 6.375% November 2011 bond was at 185bp/175bp over and Baa1/BBB rated PCCW's October 2011 bond at 277bp/272bp.
