Western HarbourÆs HK$3.5 billion loan closes over-subscribed

Led by mandated coordinating arrangers HSBC, Bank of China, Citic Ka Wah Bank and ICBC, a HK$3.5 billion ($450 million) loan for Western Harbour Tunnel Co. Ltd. has closed oversubscribed with participation from 18 banks in the sub-underwriting stage. The facility was over-subscribed to the tune of HK$5.25 billion resulting in allocations to the arrangers being scaled back by 50%. As the company cannot borrow more than HK$3.5 billion, the facility has closed without being launched into general syndication. Signing of the facility is slated for July 31.

The facility pays a spread of 87bp over Hibor reflecting the heavy demand from the banks. The facility features two tranches comprising a seven-and-a-half year term loan for HK$2.5 billion and an eight-and-a-half year revolver for HK$1 billion. The average life for tranches A and B is 5.6 years with the blended average life of 5.11 years. The borrower has the option to request the arrangers to provide an interest rate swap facility to limit exposure to fluctuations in interest rates.

According to some observers, the pricing is expensive when compared with that of Eastern Harbour Crossing's HK$750 million seven-year loan of April 2000, which priced at a spread of 75bp over Hibor. However, Eastern Harbour Crossing operates a road and rail link between Hong Kong island and Kowloon whereas Western Harbour Crossing only operates a road link. Moreover, the tenor, the structure and the timing of the two deals are different from each other.

Proceeds from the facility will be used to refinance the HK$5.2 billion raised in 1993 to part-finance the construction of the Western Harbour Tunnel in Hong Kong. That project financing comprised a HK$3bn term loan and HK$2.2bn revolving credit with a maturity of 15 years. The facility was priced at 100bp over Hibor during the four-year construction phase and subsequently increased to 150bp from the fifth year to 11 years. During the fifth to 11^th year, the facility allowed the margin to fall to 125bp provided the company passed a debt service test. The margin from the 12^th year to the 15^th year was set at 150bp over Hibor.

Western Harbour Tunnel has about HK$3.7 billion outstanding of the previous financing. The proceeds from the present loan facility will repay the outstanding amount with the remainder being repaid by existing shareholders who have injected cash to reduce debts and cover shortfalls in cash flows. Some observers believe the deal did not see participation from some of the foreign banks because of concerns over the company's cash flows. A closer look at the list of banks that have participated in the deal reveals the presence of only three foreign (non-Hong Kong, non-Chinese) banks. Observers say that the deal is more driven by abundant liquidity and by banks that view the transaction as a quasi-project finance deal. Others argue that regardless of the nationality of the banks in the transaction, the end-result is impressive.

Western Harbour Tunnel's shareholders are Adwood Co. (50%), The Cross-Harbour (Holdings) (37%) and The China Merchants Holdings (International) (13%). Adwood Co. is 70% owned by Citic Pacific and 30% by Kerry Properties.

The project, franchised to the company by the Hong Kong government as a BOT (build-operate-transfer) contract for 30 years, is estimated to have cost HK$7.5 billion. At the end of the contract period the Western Harbour Tunnel will be transferred to the Hong Kong government at zero cost.

The present facility will help reduce the interest expenses for the borrower and is secured by project assets. The facility's dividend distribution clause restricts Western Harbour Tunnel Company from declaring dividend should its debt service ratio fall below 1.1 times. If the debt service ratio is 1.1 times or above, the company can declare dividend of 50% of free cash while the remaining 50% would be used to repay the loan.

Banks joining in the transaction with commitments of $250 million or above will receive underwriting fees of 12bp and management fees of 64bp amounting to all-in of 100bp. Banks committing between $150-$250 million will receive management fees of 64bp with all-in of 98bp. The final allocations are as follows: