Mcdonald's Corporation launched a debut HK$600 million issue off its EMTN programme yesterday (Wednesday). Led by Barclays, the fixed rate bond carries a coupon of 5.44% and matures in June 2007. Pricing came at 99.75% to yield 44bp over Hibor, and had already tightened to 41bp over by late afternoon. Bank of East Asia and Standard Chartered were co-managers.
The issue, rated Aa3 by Moody's and A+ by Standard & Poor's (S&P), marks only the second such issue by foreign corporate after Walt Disney's bond issue earlier this year. In that instance, Walt Disney was required to tap the Hong Kong dollar bond market as part of its financing programme for the Disney Theme Park being built in Hong Kong. Disney's issue was launched concurrently in Singapore and Hong Kong raising S$100 million and HK$600 million respectively, with maturities of three years in Singapore and five years in Hong Kong.
While McDonald's has no such requirements, it would have been looking to satiate appetite from Hong Kong banks, which are flush with liquidity and seeking opportunities to hold quality paper on their books. Being a fixed-rate issue, it is also likely to have generated interest from fund managers, insurance companies, pension funds and non-banking institutions. Sadly it didn't offer investors a free Snoopy with their bonds.
Steve Plampin, head of syndicate, Asia at Barclays Capital, says, "This issue demonstrates McDonald's commitment to the Hong Kong market and allows the company to tap an investor base with demonstrated keen interest in quality credits. The issue has received widespread interest from institutions in Hong Kong."
Observers say one reason why a company like McDonald's would want to tap the Hong Kong dollar bond market is that it might be able to swap the proceeds at a more cost effective level than what would be achieveable in its home market. As one head of bond syndicate at a rival bank, explains, "Timing is critical in Hong Kong. The Hong Kong dollar market does present arbitrage opportunities for borrowers compared with more traditional sources of financing, primarily because of the quality of credits in this market and the sort of demand that they can command. Sometimes they can achieve very competitive cost of funds compared with straight dollar markets or other sources."
In terms of the differential, a triple-A rated issuer could save up to 15bp on a medium-term basis. The bond market paricipant adds, "If the spread differential is between 35bp over Libor in the dollar market versus 20bp or 25bp on an after swap basis here, then a triple-A rated issuer will do it. In the context of a single-A or triple-B rated issuer, the savings would probably have to be a bit higher to justify it depending on the sector and the tenor of the financing.
"Some of the Korean banks have been tapping the Hong Kong dollar market on an after-swap basis and they've been able to achieve 10bp to15bp better pricing compared with the dollar loan or FRN markets," he continues. "For one-year or two-year transaction, that's quite a good saving for them in the context of where they presently are trading at about 30bp over Libor."
