Investors fell over themselves to subscribe to Hon Hai Precision's Reg S deal, the first US dollar bond to be issued by a Technology, Media and Telecom (TMT) company in Asia so far this year.
Hon Hai, which is listed on the Taiwan Stock Exchange, is the world’s largest electronic manufacturing services (EMS) provider and a major contract manufacturer for leading brands like Apple, Nokia and Huawei.
The order book reached $5.7 billion for the Taiwanese firm’s US dollar bonds. In the end it printed $1 billion, made up of $700 million 5-year paper and $300 million 10-year bonds. “There was very strong demand,” said one market source.
The senior unsecured notes priced yesterday at a reoffer spread of Treasuries plus 125 basis points and Treasuries plus 155bp for the 5-year and 10-year bonds respectively. This is 30bp tighter on both tranches from initial thoughts and at the tight end of final guidance. The coupon on the five-year is 3.75% and 4.25% on the 10-year.
The bonds will start to trade on the Singapore Exchange on March 12. Hon Hai has an A- rating with stable outlook from S&P.
For comparison, Flex, another EMS firm, has an outstanding 10-year $600 million bond due June 2025 at a spread of Treasuries plus 190bp. With a coupon of 4.75%, the US firm’s bond is currently yielding 4.36%. It is rated BBB- by S&P.
The bullish investor demand for Hon Hai’s bonds comes on expectations that the Sino-US trade war is likely to end soon with a deal between the world’s largest and second largest economies. Hon Hai has more than 10 factories in China, its largest manufacturing base. The trade war, prompted by US President Donald Trump last year, is a key reason that manufacturing was the sector with the most corporate bond defaults in China over the past year.
The Taiwanese manufacturer is in the good books of the US president, who is trying to bring jobs back to the US. At the beginning of February, Hon Hai, which is also known as Foxconn Technology Group said that “after productive discussions between the White House and the company, and after a personal conversation between Trump and chairman Terry Gou,” Foxconn was going ahead with plans to set up a plant in the US state of Wisconsin.
Trump tweeted on the same day: "Great news on Foxconn in Wisconsin after my conversation with Terry Gou!"
The continued dovish attitude of the US Federal Reserve towards interest rates is another factor that has boosted US dollar bond issuance. On Tuesday, Eric Rosengren, a voting member of the policy-setting Federal Open Market Committee, said that the Fed may need “several meetings” before it decides whether to raise interest rates. Rosengren’s comments reiterate earlier dovish statements by other Fed officials.
An S&P report in late November said that Hon Hai’s operating cashflow might improve and slightly lower its debt leverage over the next few quarters. The ratings agency warned, however, that Hon Hai’s profitability might come under pressure from its business for Finnish telecom giant Nokia.
A JP Morgan report around the same time expected Hon Hai’s profit margin outlook to remain negative due to declining unit sales of Apple iPhones this year. JP Morgan said that it was "neutral" on the group.
Hon Hai is expected to report a 3.6% fall in profits to NT$107.2 billion (US$3.5 billion) for 2018 according to Bloomberg. Hon Hai’s revenue for the whole of 2018 rose by 12.5% to NT$5.3 trillion, while its monthly revenue in January grew by 3.4% to NT$414.1 billion, according to the company's website.
Proceeds of Hon Hai’s bonds will be used for capital expenditure, refinancing and general corporate purposes. Joint bookrunners and lead managers on the deal are Bank of America Merrill Lynch, Bank of China (Hong Kong), Citi and HSBC.
