Hutchison brings tender to investment-grade investors

Hutchison Whampoa's tender offer for four of its outstanding bonds at the end of last week takes debt buybacks in Asia to a new level, giving buyers of investment-grade corporate bonds a chance to recoup their money early. Other high-grade companies have been buying back bonds on a smaller scale in the open market for liability management purposes, but Hutchison (rated A-/A3) is upping the ante by offering to buy outstanding bonds at a total cost of $1.5 billion, making this a true liquidity event for the bondholders.

So far, tenders have been used primarily by high-yield companies that were already in breach of covenants or needed to limit their future interest payments to ensure they would be able to continue to service their debt, or by banks trying to reduce their subordinated liabilities. These tenders have been for bonds trading well below par and have, without exception, been completed at a discount to face value. China Greentown Holdings, which last week said that almost 90% of its bondholders had accepted its ongoing tender offer by the early deadline, and Pakistan Mobile Communications, which announced on Friday that its tender offer had been oversubscribed and that it would buy back $137.8 million worth of its sole international bond, are two examples. Like the others before them, these tenders were both completed at prices below par -- albeit at premiums to where the bonds were trading before the respective offers -- with Greentown offering 85 cents on the dollar for investors who tendered before the early deadline and Pakistan Mobile paying up to 73 cents per dollar of principal.

Hutchison's tender is less easy to value since the company is offering to pay a spread over US Treasuries, rather than a fixed price. According to Brayan Lai, a credit analyst with French investment bank Calyon, based on current yields, the company is offering to pay at least par for three of the four bonds and just below par for the fourth one. This can change during the offer period, however, depending on the movement in US Treasuries.

But this may not matter since the investors who are targeted with this tender are those who hold the bonds on a spread basis anyway. For them, the gap versus Treasuries is a lot more important than the absolute price and that gap will remain constant throughout the offering period.

According to a release issued on Friday, the Hutchison tender is available for investors holding: the 6.5% bonds due 2013 of which there are $3.5 billion outstanding; the 6.25% bonds due 2014 with $2 billion outstanding; the 7.5% bonds due 2027 with $500 million outstanding; and the 7.45% bonds due 2033 with $1.5 billion outstanding. The longer maturities will be prioritised (with the 2027s taking priority over the 2033s), which means that if investors holding a combined $1.5 billion in those two issues decide to accept the offer there will not be any money left for the shorter bonds.

Analysts say the offers for the shorter maturities are the most attractive, however, and note that it may not be that easy for investors to find suitable replacement bonds for the longer maturities. For investors who want to shorten the duration in their portfolios, they describe the offer for the longer maturities as okay rather than attractive or exciting. As always when it comes to tenders though, investors are faced with the possibility that if they don't tender and other investors do, they may end up holding a bond that is very illiquid. That could act as an incentive for them to sell back the bonds now.

Starting with the most prioritised issue, investors who tender the 2027 bonds will receive a spread of 318bp over the 4.5% Treasury note due in May 2038; while the 2033 bonds will pay a spread of 333bp over the same 2038 Treasury note. For the shorter maturities, the spread has been fixed over the 1.875% Treasury note maturing in April 2014, with the 2014s paying 257bp over and the 2013s paying 251bp over. These spreads all include an early tender premium of 3 cents on the dollar for investors who accept the offer before May 21. Investors who accept after that date, but before the offer closes on June 8, will have to subtract the 3 cents.

Market participants estimate that the 2027s and 2033s were both offered at a spread of about 370bp over the relevant Treasury note when the tender spread was fixed after the Hong Kong market closed on Thursday last week. The 2014s and the 2013s were offered at about 280bp over.

Lai at Calyon estimated in a research note on Friday that the tender spread translates into a price of 100.57% of face value for the 2027s; 98.4% for the 2033s; 106.6% for the 2014s and 106.5% for the 2013s. In other words, Hutchison will incur a loss for every bond it buys back from the shorter maturities (and a marginal loss on the 2027s). The reason why the company may still want to do this, he says, would be to get rid of these coupons, which at 6.25% and 6.5% are quite high for debt with such short tenor.

"In Asia, most of the short-dated, high quality issues out of Hong Kong and Malaysia, and even some of the Korean names, are pretty well bid in the market. Hutch is no exception to that and I think for the 2013s and 2014s they need to offer a premium," Lai said.

Being a savvy borrower, the Hong Kong conglomerate, whose businesses range from ports and telecoms to property development, has obviously thought this through though and wouldn't be offering that kind of premium if it didn't make sense from a long-term cost-saving perspective. Hutchison has been buying back shorter-dated bonds in the market and pre-paying part of its subordinated debt since last year, which means a tender for its senior debt was a natural next step.

"Hutchison has a history of buying back its debt at times when there aren't many business opportunities so I don't think this is a big surprise, given their huge cash pile at the end of 2008," said one credit analyst who declines to be named.

Hutchison had HK$88 billion ($11.4 billion) of cash on hand at the end of 2008. This compares with HK$22.9 billion of debt maturing during the course of this year.

While not confirmed, it now also seems obvious that the company had this exercise in mind already when it issued $1.5 billion of new 10-year bonds in early April. The fact that the issue amount is identical to that of the tender offer simply cannot be a coincidence. Hutchison said at the time that the proceeds from the new issue would be used as general working capital and to refinance debt.

The new bonds carry a coupon of 7.625% and were reoffered at a yield of 7.672%, translating into a spread of 475bp over the relevant US Treasury note.  

The tender offer is being arranged by Morgan Stanley.

Meanwhile, Greentown saw strong support for its tender offer, which was coupled with a consent solicitation to substantially change or eliminate all the restrictive covenants and certain events of default. The Chinese property developer, which was already in breach of a number of covenants, said last week that bondholders representing 89.7% of its $400 million 9% bonds due 2013 had accepted the offer by the May 4 early deadline, while consents had been delivered by holders of 91.9% of the bonds. Deutsche Bank is the arranger.

Investors can continue to tender their Greentown bonds until May 19, but will no longer receive the early tender payment of 5.9 cents and the consent payment of 1.6 cents. This will result in a total tender price of only 77.5 cents to the dollar versus the 85 cents they would have receive before May 4, which suggests that bondholders who wished to tender have in all likelihood already done so.

Pakistan Mobile received valid tenders in excess of $153 million for its offer to buy back $140 million of its $250 million 8.625% subordinated, senior, unsecured bonds due 2013, and accepted to buy back bonds with an aggregated principal of $137.8 million at a total cost of $100.6 million. Bondholders were initially asked to tender bonds at a price between 70 and 77 cents to the dollar, but after the early tender deadline on April 21 the company fixed the price at 73 cents to the dollar, including an early tender premium of 3 cents, and also extended the early tender deadline to April 27. At the same time it also increased the size of the tender to $140 million from $100 million. The offer, which was arranged by Citi and Deutsche Bank closed on May 6.