Hong Kong's second largest rail company, KCRC, has confirmed that it is looking to return to the Hong Kong dollar bond market for the first time since 1985. It is planning to issue HK$1 billion worth of bonds in May and has appointed HSBC to arrange the sale.
"The current climate is very favourable for a new bond issue," says Jeffrey Cheung, deputy director of finance at KCRC in an interview with Financeasia.com at the sidelines of the CSFB conference in Hong Kong. "This is especially true of companies like ours which investors equate to government credit."
The new issue will likely be split into two tranches or even two separate deals, one aimed at retail investors and one aimed at institutions. Cheung says the split could be 40% retail and 60% institutional depending on the market reception.
The recent success of the Airport Authority of Hong Kong's retail bond deal seems to have been a big deciding factor in the structure of the issue. "The retail bond market is still quite short in maturity," said Cheung. "But the Airport Authority issue demonstrated that retail investors are interested in longer maturities and higher yields at the moment."
Market sources suggest that a likely outcome will be for a five-year retail bond and a 10-year institutional bond, for which KCRC will offer a consistently higher yield. Cheung confirms that such an outcome will depend on the pricing terms. "Pricing is very important to us but we also want long term funds," he comments. "If the long term costs are in a reasonable range then we do not mind obtaining long term funds."
Cheung also says that towards the second half of the year, KCRC is also looking to return to the syndicated loan market. KCRC last tapped the Hong Kong dollar syndicated loan market in 1995. "Banks have no exposure to us at the moment and they are hungry for our assets." The company is looking to raise around HK$5 billion from such a loan.
Cheung scotched rumours that the KCRC was likely to return to the international dollar bond market this year, saying such an issue would probably come out in 2004.
The KCRC has funding requirements of HK$30 billion over the next five years for its West Rail and Shatin to Central Link projects. At present all that money is scheduled to come out of retained earnings and the debt markets. Constant market talk about a possible IPO and merger with the MTRC do not figure in its funding plans.
The new issue should meet with strong investor demand. On top of the scarcity value of the KCRC, the company is also one of the best credits around. 100% government owned, it has nevertheless been consistently profitable for 18 years. It has also grown profits every year for all of those 18 years.
It has few of the problem property assets that beset other Hong Kong credits and has weathered the increasing competition from bus companies well. Indeed, despite a 0.5% fall in passenger volume in 2002 over 2001, its higher yielding cross boundary traffic between Hong Kong and China actually grew by 6%, allowing it post better numbers.
Some concerns will lie with investors who fear that a possible KCRC merger with the MTRC would be disadvantageous for the company, due to MTRCs bigger property weighting. Other concerns surround almost constant political pressure on both rail companies to lower their fares, something KCRC has masterfully resisted so far. But overall, the name, quality and scarcity of the credit should ensure a smooth ride.
