Under the lead management of DBS Bank, Intel Capital, the strategic investment arm of Intel Corp, has purchased an exchangeable into PCCW that stands to increase its stake by a further 1.4%.
As the bonds were issued by the Singapore-listed parent company Pacific Century Regional Developments (PRCD), the deal will not increase the debt load of PCCW-HKT into which it is exchangeable. This is particularly important for the group ahead of its March 31 year-end, as it is trying to bring debt to EBITDA below 3.5 times - the trigger on its loan covenants allowing it to upstream more dividends from the cash cow (PCCW-HKT) to the parent (PCCW), which has little incoming income but a sizeable debt load of its own and capital expenditure needs to fund Cyberport.
The equity-linked deal has an equal maturity split of four, four-and-a-half and five years, pays a 3% coupon on a semi-annual basis and has an exchange price of HK$2.50, a 9.5% premium to Friday's HK$2.275% close. PRCD has the option to redeem the bonds for either cash or shares and assuming full conversion will see its stake drop to 32.1%.
Terms are very similar to a $250 million SREB transaction issued by PRCD in October last year, when three American International Group (AIG) companies purchased a 3.7% stake via a five-year bond issue that re-financed a previous $200 million deal of August 2000. Terms comprised a 3% coupon and exchange price of HK$2.290, a 4% premium to spot.
Although neither Intel or PCCW have provided many details regarding the background of the latest equity offering, it is thought to relate to an option embedded in the August 1999 creation of Pacific Century Cyberworks, when Richard Li's privately-owned company Pacific Century Group (PCG) took over Tricom Holdings.
Prior to this in March 1998, PCG and Intel had established Pacific Convergence Corp (PCC), a 60/40 joint venture envisaging the provision of broadband internet services to, "110 million Asian households in 63 countries." When PCCW was formed via the Tricom takeover, PCC was also folded into the mix, although Intel retained part of its investment in PCC, with an option to sell the remaining stake over a 10-year period in return for more PCCW shares. If the option was not exercised within the specified timeframe, PCCW could require it to be exercised.
Subsequent to the take-over and a $50 million investment by Intel into 77.8 million new PCCW shares at HK$1 each, the chipmaker owned 5% in the group.
PCCW meanwhile is said to be considering an equity-linked bond as the next stage of its ongoing strategy to rid itself of the restrictive covenants, which stop it upstreaming dividends from Hong Kong Telecom to PCCW. According to HSBC fixed income analyst Imogine Baker, the company had a debt to EBITDA ratio of 3.8 times at the half year mark in September 2001, but having re-paid part of its $4.7 billion syndicated loan since then, is currently on course to finish the year slightly under 3.5 times.
The loan covenants state that if PCCW's total debt to EBITDA exceeds 3.5 times, it can only dividend up 35% of net profits. If this level falls to between 2.5 times and 3.5 times, however, it can dividend up 75% and if it falls below 2 times, it can dividend up 100%.
According to HSBC figures, total debt at PCCW-HKT stands at $4.145 billion. Of the $4.7 billion syndicated loan, the group has now fully re-paid the $1.5 billion first tranche and partially re-paid the $2.3 billion second tranche.
As a result, this leaves $1.99 billion of the second tranche due 2006 and $0.9 billion of the third tranche due 2008. In addition, the group also has a $1 billion bond outstanding due 2011 and a Y30 billion private placement, for which it issued a guarantee.
Baker concludes that, "based on our calculations, we estimate PCCW-HKT's potential refinancing requirements for 2002 to amount to a maximum of $900 million."
