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Hong Kong billionaire Li Ka-shing’s Cheung Kong Holdings last night closed a S$500 million ($415 million) senior perpetual, the first of its kind in Asia. While perpetual issuance has picked up in the region this year — until the markets hit a brick wall — so far they have all been subordinated in nature.
The deal further burnishes Cheung Kong’s reputation as a shrewd and innovative borrower. Last year it re-opened the market for perpetuals in Asia after more than a decade-long hiatus with a $1 billion issue. Its latest foray into the Singapore dollar bond market allows it to lock-in funding at a low rate and reap the arbitrage opportunity offered by the Singapore dollar bond market.
DBS and J.P. Morgan were joint bookrunners. The latter was said to have brought the idea to the client and also acted as a sole bookrunner for Cheung Kong Infrastructure’s perpetual last year.
As this was one of the few deals of a decent size in Asia’s bond markets, Cheung Kong’s Singapore dollar senior perp was intently watched as an indicator of how receptive domestic investors would be to a new structure.
Cheung Kong Holdings, the flagship company of the Cheung Kong Group, gathered solid support from private banks thanks to its strong name recognition and blue-chip status. The issuer has an unsolicited A- rating from S&P. The deal gathered an order book of more than S$700 million. The price whisper was in the low 5% region, with guidance coming in at 5.125%. The deal finally priced at 5.125%.
While this was considered tight by some, the bonds nonetheless offered a yield pick-up amid the current low rate environment — Singapore’s swap offer rates moved into negative territory for the first time in history last month.
Private banks were allocated 80% of the bonds, asset managers 11%, banks and others 9%. As is the case for most Singapore dollar bond deals, it was overwhelmingly bought by Singapore investors, who were allocated 95%. Investors from Hong Kong and other regions took up the rest.
The bonds are callable at the fifth year and at every distribution date after that. Like Cheung Kong Infrastructure’s (CKI) perpetual that priced last year, there is no coupon step-up or reset and, as a result, little incentive for the borrower to call the bonds. In other words, investors could well be holding the bonds for an infinite amount of time.
“This is a true perpetual. Unlike all the recent issues we’ve seen this year, there are no resets or step-ups in coupon and, hence, the likelihood of the borrower calling the bonds is slim,” said one person away from the deal.
In contrast to CKI, Cheung Kong Holdings’ perpetual is senior and there is no mandatory coupon deferral — both positives for the investors. Cheung Kong Holdings has the option to defer a coupon and if it does so, it is cumulative. There is a dividend pusher and stopper.
The perpetuals, which are unrated, will get 100% equity treatment for accounting purposes. Previous perpetuals from Philippines’ port operator ICTSI and Chinese real estate company Sino-Ocean Land were similarly unrated, but both borrowers chose to issue subordinated bonds for loan covenant purposes. Most lenders don’t treat a senior bond as equity for the purposes of debt-to-equity calculations in loan covenants.
“It’s fine to have a perpetual treated as equity from an accounting perspective. But it’s not much good if your lenders don’t treat it as such — what cost benefit is there? And in Asia, most lenders don’t,” said one person away from the deal.
However, Cheung Kong Holdings’ senior perpetuals are likely to be treated as equity by its lenders, according to one person familiar with the deal, and there were a few reasons for Cheung Kong to issue a senior perpetual aside from tighter pricing. For example, Cheung Kong will be using the proceeds offshore and could swap them into US dollars. As the perpetuals are treated as equity for accounting purposes, any foreign exchange fluctuations will not affect Cheung Kong Holdings’ profit and loss statement, but will instead be reflected in its reserve account, the person added.
The comps for the deal included the CKI perpetual, which was trading at a cash price of 92 and a yield of 7.3% on Wednesday. Cheung Kong Holdings had also sold a dual-tranche S$500 million five- and seven-year bond in July, and those notes were yielding 2.6% and 3.4% respectively.
According to a Nomura research note, assuming Cheung Kong swaps the proceeds to US dollars, the cost of funding is expected to be about 6.1%. In contrast, Cheung Kong Holdings could have expected to pay 7% to mid-7% if it had tapped the dollar bond market in current market conditions.
Given the arbitrage opportunities, more Hong Kong borrowers could tap the Singapore dollar market — as Wharf Holdings and Wheelock have both done during the past two months.
Amid a dearth of deals in the US dollar bond market, Cheung Kong Holdings’ perpetual also highlights the liquidity available in domestic bond markets. “The dollar market has been all over the place. If this flies, you can bet a lot more issuers would start looking at the Singapore dollar market,” said one banker. “I’m not sure whether many borrowers would want to do a senior perpetual though.”
The deal is the second Singapore dollar perpetual to be issued by a company and the first for a foreign borrower. Water treatment company Hyflux issued the first Sing dollar corporate perpetual in April this year.
Cheung Kong Holdings is a property development and strategic investment company. The company is one of the biggest developers in Hong Kong of residential, commercial and industrial properties.
