In a move highlighting the value that PCCW puts on its bank relationships, the company has agreed to underwriters' requests to increase the margin spread it will be paying on its $4.7 billion refinancing loan.
HKTC - the Hong Kong fixed line and mobile business subsidiary of PCCW - is raising the money in a three tranche loan with maturities of three, five and seven years. The margin increases are laid out below:
Tranche | Amount | Tenor | Margin over Libor increase | ||
A | $1.5 billion | 3 | Increased from 50bp to 85bp | ||
B | $2.3 billion | 5 | Increased from 65bp to 115bp | ||
C | $0.9 billion | 7 | Increased from 80bp to 145 bp | ||
The original loan was firmly underwritten by five arranging banks in December last year. They are Barclays Capital, BOCI Capital, Chase Manhattan, Fuji and HSBC. PCCW could have gone ahead with the loan at the original pricing and made the banks lend the money at the previously agreed rate. However due to the global increase in debt costs for telecom companies, the banks were finding it very hard to get a sub-arranger group together before going out for general syndication. Therefore in order to get more banks in the syndication and close the deal as soon as possible, PCCW agreed to the increase in price, even though it will add $22.6 million to HKTC's annual borrowing costs for the facility.
This amount can be seen as the price PCCW is willing to pay to keep its bankers happy. One reason why the company was wiling to up the price was that due to the Federal Reserve's drop in US interest rates in mid-week, PCCW was already paying 50bp less for the facility than it originally agreed to. By upping the margin, the banks are now getting more returns, the company is paying roughly the same as it was before and the borrowing costs are more in line with global telecom loans. The bankers arranging this transaction view this as a "win–win situation".
The banks extracted a further concession from PCCW: the company agreed to limit the amount of dividends that HKTC can pay its parent PCCW. If HKTC's debt to EBITDA ration exceeds 3.5 times, then HKTC can only pay a maximum of 35% of its income in dividends to its parent.
This kind of ring fencing suggests that even though the main problems with the loan were of a pricing nature, the banks still used the re-pricing process to further rein in management.
According the Eleanor Li of HSBC, the increase in margin will allow a sub-arranger group to be finalized by the end of next week. Although it is still uncertain how many banks will be in the group, the coordinators want it to be 10-15 banks strong.
When general syndication takes place after that, PCCW want to get more than 31 institutions into the facility, more than the number of banks that took part in the original loan last March which PCCW used to finance its takeover of Hong Kong Telecom. The company and the arranging banks are already using this as a guide as to whether the refinancing is successful or not.
One casualty of this increase in price is the other PCCW loan that is being arranged for its internet backbone joint venture with Telstra, called IPBC. This loan was firmly underwritten by Barclays and Chase at the same margins as the original HKTC refinancing. IPBC's $1.5 billion facility now looks extremely cheap and potential syndicate members will surely be looking for a similar upgrade in price as has happened for HKTC.
