In July, PCCW-HKT's shambolic efforts to access the US dollar market for $3.8 billion were characterised by lengthy roadshows, deteriorating market conditions, overblown expectations and four bookrunners all pulling in different directions. Few would have, therefore, expected the clarity and focus which it bought to bear yesterday, as investor presentations and most of the original syndicate group were dispensed with, leaving just one bank - JPMorgan - to maintain tight control of proceedings.
Bankers believe the BBB/Baa2-rated group's chief success has been to secure a lower cost of borrowing than it would have been able to in July, even though it has done so at the cost of paying a wider spread and a greater pick-up to comparables. The $750 million 144a bond due November 2011 was priced after New York's open at 99.705 with a coupon of 7.75% to yield 360bp over Treasuries. There are also provisions for a 25bp step-up in coupon per downgrade per agency.
In July, the four bookrunners - Morgan Stanley, Barclays, HSBC and JPMorgan - were able to build a book for a downsized $1.5 billion offering at 325bp over Treasuries. At this point, however, 10-year Treasuries were at 5.18%, meaning that PCCW-HKT would have had to pay an all-in yield of 8.45% compared to 7.79% this time round, based on an underlying Treasury yield of 4.19%.
Where comparables are concerned, BBB-/Baa2-rated Citic Pacific, the Hong Kong credit which then had the closest rating to PCCW-HKT, was also trading at 325bp over Treasuries on July 20, the day that the first deal was pulled. Yesterday, the company was trading at 343bp bid, some 17bp tighter than the level at which PCCW-HKT priced.
The other main comparable, Telekom Malaysia, which has the same rating as PCCW-HKT, was trading at a bid/offer spread of 295bp/280bp in July. Yesterday, it was trading at 253bp bid, roughly 100bp tighter.
Yet most comparisons now are likely to be drawn against Jardine Strategic, which has a one notch higher rating of BBB+/Baa1, but was able to complete a $300 million 10 year offering some 136bp tighter than PCCW-HKT only three business days ago. Bankers comment that the differential between the two can be attributed to the larger size of PCCW's transaction and its heavier dependence on US demand, in turn a reflection of the poor standing in which the credit is held in the Asian region.
Indeed, one of the company's chief failings in July was its inability to secure virtually any demand out of its home region, where it ended up with an order book of only about $25 million. This time, there were said to be a total of 90 investors in the overall book, which closed two times oversubscribed with a geographical split that saw about 55% of paper placed in the US, 35% in Asia and 10% in Europe.
Observers also note that although US demand drove the deal, there were a surprising number of sizeable tickets from Asia and more private banking demand than expected. In building the book, the lead also decided to generate momentum by opening it in the US first and letting Asia follow through the next day.
"There was no need for a roadshow or even an investor conference call," one observer comments. "The company could build on the work it did during the original roadshows and has been active since then building key relationships with individual accounts."
The strategy PCCW appears to have pursued to such success mirrors a previous deal for the Federation of Malaysia, which re-opened a 2009 bond with a $350 million trade that was executed within a day last September. Both transactions were overseen by JPMorgan's head of Asian sales and trading, Chris Nicholas, then head of Asian fixed income at Chase.
For both deals, Nicholas' aim seems to have been to create runaway successes by keeping the issue size small and rapidly building momentum as the order book passes across the globe. In both cases, the issuer had also had a nasty experience being held hostage to market conditions and wanted to be able to act decisively when timing was felt to be opportune.
Some commentators have suggested that JPMorgan was able to persuade PCCW-HKT to give the bank sole books by back-stopping the deal at 362.5bp over. It is an accusation strenuously denied by the lead.
"It's simply not the case," says one banker. "PCCW-HKT was well aware that it had to complete a market clearing deal. If investors had thought that we'd underwritten the whole lot, they would have killed us for it."
Within an hour of breaking syndicate early in the US afternoon, the deal was trading at a bid/offer spread of 350bp/345bp.
Proceeds from the deal will be used to partially re-finance $4.7 billion in bank debt undertaken to pay for the acquisition of Hong Kong Telecom. The company has also said that it intends to prepay a further $750 million with its own cash reserves before the end of the year.
