The A3/A-rated credit's ability to dispense with formal roadshows and launch an accelerated book-built transaction over the space of 48 hours has spoken volumes about the careful credit and investor relations work it has undertaken over the past few years. With the exception of the occasional sovereign issue and numerous re-openings by the Republic of the Philippines, no other Asian borrower has been able to take advantage of stable issuance conditions and act so decisively.
Led by Goldman Sachs, HSBC and Merrill Lynch, the railway operator raised $600 million (increased from $500 million) through a 10 year SEC-registered global, priced at 99.149 with a coupon of 7.5% to yield 187bp over Treasuries. There was no other syndicate.
Key to its whole strategy was to pick two clear days in which to proceed with minimum execution risk. "The whole recent history of the markets has been hugely volatile equity markets creating volatile corporate bonds spreads and leading Treasury prices to bounce around all over the place," says one banker. "We needed to find a window which would let us come quickly and the decision to get on the plane to New York was only taken on Monday."
Finding the right launch slot was also overshadowed by events in the US. Presidential elections and Thanksgiving, when combined with the next FOMC meeting, means that the deal would either have had to be launched this week, or not until the first week of December.
"Call it luck or call it good judgment, we picked a narrow window of opportunity and the markets were very good to us," reflects one lead official. "Even Treasuries were very range-bound, with the transaction's reference 10 year rate moving in a 5.73% to 5.76% band."
Having formally decided to proceed on Monday, market soundings were taken over the course of the day and the deal itself launched in New York on Tuesday at an indicative spread of 187bp to 190bp over Treasuries. Over the next 24 hours, an order book totaling $1.5 billion was created.
Demands for an Asian pricing premium were notably absent from US investors, who were even prepared to countenance parity pricing to the group's outstanding 2009 bonds. Bankers attribute the MTRC's ability to achieve this to pent-up demand from investors that have cash to invest, but nowhere comfortable to put it. There has been a dearth of issuance from the region all year and particularly from the kind of quality names favoured in volatile markets.
"We always expected the Asian bid to be strong because of the positive momentum created by the MTRC's recent privatisation programme," one banker comments. "But even we were surprised by just how favourable US investors were as well."
Bankers report a geographical split which gives Asia 55%, the US 25% and Europe 20%. The Asian book was said to be particularly strong and just shy of 70 accounts in total. Orders were said to be fairly evenly balanced in terms of investor type and also size, with $10 million said to be the average.
"What was interesting was the fact that we saw interest from Korean banks and Tokyo-based Japanese banks for the first time in a very long time," says one banker. "The Korean banks appear to have a bit more liquidity to play with and the Japanese found the deal attractive on an asset swap basis, although the deal as a whole wasn't driven by this type of demand."
Indeed, although the deal appears aggressive in comparison to outstanding Treasury spreads, it gives banks an attractive yield pick up. The Kowloon Canton Railway Corporation (KCRC), for example, launched its 8% 2010 bond earlier this spring at 60bp over Libor on a swapped basis to its re-offer price of 170bp over Treasuries. By contrast, the MTRC is offering accounts an asset swap level of about 77bp over Libor.
At the time of pricing, the MTRC's $750 million 7.5% February 2009 bond was trading at 187bp bid, while the KCRC 2010 was trading one basis point wider at 188bp. Both have moved very little over the past few weeks in comparison to benchmark single-A credits which have suffered from negative sentiment towards the telecoms sector, volatile equity markets and too many jumbo transactions where investors have been able to dictate pricing.
However, while observers say that the MTRC is still judged to be trading relatively tightly to its peers, credits such as Ford Motor have tightened over the past few days. The A2-rated auto manufacturer's 10 year bonds are currently quoted about 195bp bid. Other market staples such as GMAC and Daimler Chrylsler were both bid at the 183bp level.
Applauded for its market savvy and sophistication, the MTRC has certainly wiped away the memory of its last foray to the international markets in January 1999 when it became trapped by speculation surrounding a Chinese currency devaluation.
Having shown that there is a strong global bid for quality paper from the region, the success of its deal may also have a wider positive impact, particularly across Greater China spreads. "The fact that the US book held firm at 187bp tells you a lot," one banker concludes. "It's very rare for any borrower to price flat to outstandings and Malaysia recently re-opened its 2009 bond at 15bp new issue premium. We hope that the whole Hong Kong credit curve may now shift down."
