On the basis of their respective ratings, the answer would appear to be no. Hutchison Whampoa is rated A3/A, while Jardine Strategic received a rating of Baa1/BBB+ yesterday - some two notches lower from Standard & Poor's.
On the basis of the spread differential between Jardine subsidiary Hongkong Land and Hutch on the other hand, the answer is almost certainly yes. When the former delivered a debut Eurobond in late April, many were sceptical that it would be able to price through Hong Kong's de facto corporate benchmark because it has a one notch lower rating from Standard & Poor's (A3/A-) and some bankers argued that Hutch should be accorded a liquidity premium. Yet it not only managed to come 15bp through Hutch, but is now trading 60bp through at a bid level of 162bp over Treasuries against Hutch's 221bp.
As Hutchison has been hit by worsening sentiment towards the telecommunications sector, Hongkong Land has benefited from a flight to quality, which has also pushed MTR Corp paper through 100bp over Treasuries on its 10-year paper. Both Hongkong Land and MTR have tightened about 35bp since the former priced a $600 million 10-year offering on April 26 at 195bp over Treasuries.
For many observers, therefore, success will be measured by how close the parent can come to the subsidiary. As expected, the former has a conglomerate discount factored into its rating, with both agencies assigning a stable outlook.
Roadshows begin today (Tuesday) in Hong Kong and Singapore under the lead management of Goldman Sachs, HSBC, JPMorgan and UBS Warburg. Because of the short marketing period before pricing on Friday, there will two teams, with Hong Kong and London roadshows being led by finance director Norman Lyall and Singapore and US roadshows led by group treasurer Francis Heng.
The group is hoping to raise $300 million in 10-year paper. In doing so, it will add to $775 million debt at the holding company level. Analysing the debt ratios of the group is complicated by the way it is structured, however.
Analysts point out that the group can be analysed at a holding company level, at a consolidated level, or at the group level. This is because there are only two entities within the Jardine group in which the parent owns more than 51% - Dairy Farm and the Mandarin Oriential group. The consolidated accounts, which include these two, show that the group had $395 million in short-term debt and $1.368 billion in long-term debt as of the first six months of this year. On a wider group level, however, the company has $3 billion in debt.
In terms of upstreaming dividends to pay down holding company debt, the two biggest contributors are normally Hongkong Land and Jardine Matheson. In 2000, the parent received a total of $110 million and over the first six months of this year, $118 million.
But as one analyst explains, "The rating agencies would have been more concerned with the stability of the dividend payments over the past three years, rather than their absolute size. In this respect, Jardine Strategic comes out well."
With a net interest coverage ratio of 3.1 times 2001 earnings (including dividends), analysts say the company is well cushioned for its ratings category. According to Standard & Poor s, Jardines has an operating lease-adjusted net debt to capital ratio of 32.7% or 44.1% excluding revaluation reserves.
