Cheung Kong Infrastructure’s (CKI) corporate hybrid hit an unexpected stumbling block with the Luxembourg Stock Exchange late last week. The deal was set to print on Friday night but, according to a source, was held up at the eleventh hour as the exchange had questions over whether the hybrid should be listed as equity or debt, and also wanted additional disclosures.
On Friday, the leads — Goldman Sachs and J.P. Morgan — had marketed a $300 million deal to investors at a 7% pricing. Investors were told that the books would close for any new orders at 5pm and that the deal was more than two times covered. It was on track to price on Friday night, but then there was a hitch.
“The exchange raised questions as to whether CKI should be listed as equity or debt,” said the source familiar with the deal. “If it was an equity deal, it would require a different set of disclosures. We thought it was rubberstamped but right at the very last minute on Friday, Luxembourg told us they had more questions.”
On Monday morning, the leads told investors that the company was delaying the proposed transaction “due to unexpected issues in the Luxembourg Stock Exchange listing process”.
“Specifically, the listing committee of the exchange has requested further submissions as to the correct listing regime to apply because of the innovative nature of the structured debt securities before allowing them to be listed,” the statement said. “The company will reconsider accessing the market upon resolution of this issue, subject to market conditions.”
The hybrid was novel as it used equity upside to increase the probability of a call — a structure that has not previously been used in any Asian perpetual. Assuming the deal is approved, bond investors will be able to convert their bonds to shares after five years and have to take a view on whether they expect CKI’s shares to trade higher during that time. If they do, there is a high likelihood of CKI calling the bonds back rather than allowing bondholders to reap the equity upside.
Bond listings on exchanges are typically straightforward and queries are uncommon. However, in CKI’s case, the novelty of the structure meant that exchange officials had more questions than usual.
Rivals were scathing in their assessment of the way the leads handled the deal, with one rival describing it as a “total car crash”. “It’s embarrassing for the company, leads and lawyers. Usually, all the documents have to be lined up before a deal goes ahead but in this case it looks like it was not,” he said.
The source familiar with the deal said that investors were informed that the deal was subject to final listing approval from Luxembourg, which is to say that the risk was flagged to investors.
“We saw a window and wanted to grab the opportunity. Unfortunately, the Luxembourg Stock Exchange raised some issues at the very last minute and the timetable slipped. Hopefully, it is just a one-day delay and once we have resolved this technical issue we can go on with the deal,” he said.
Based on the $300 million deal size on Friday, it looked like the deal was not getting as much traction from investors as had been hoped for. The company had said it planned to raise up to $500 million from the deal and there was also noise that CKI’s perpetual was underwritten by the lead arrangers, which was denied by the source close to the deal.
For bondholders, the key downside risk is if CKI’s shares are trading lower in five years time or, worse still, for a longer period of time.
“The big question is if CKI’s shares will trade higher, and although most people expect it to, the danger is that if the European banking crisis doesn’t get resolved and China runs into problems, those shares could be trading lower for the next 20 to 25 years and investors would get stuck holding a true perpetual with no reset or coupon step-up,” said the rival.
Increasing the likelihood of a call with equity upside meant that CKI could pay a lower coupon. The rival added that if Cheung Kong had priced a true perpetual, it would probably have had to pay a coupon of 7.75%, whereas if they were offering an investor-friendly perpetual with a big reset and step-up they might have had to pay 6.25%. This put the 7% pricing at the mid-point.
Goldman Sachs was the sole structuring agent for the deal.
