HSBC closed a $500 million 10-year deal for PCCW-HKT last night (Thursday) slightly inside price guidance of 240bp to 250bp over Treasuries. After a one-day bookbuild, pricing was settled at 99.533% on a coupon of 6% to yield 6.063% or 237bp over Treasuries.
It was a deal where everyone appears to have won. For the lead manager, fees of 47.5bp equate to the kind of compensation levels rarely countenanced by other borrowers. For PCCW-HKT, an inverted swap curve enabled pricing of a 2013 transaction inside a 2011 deal on a Libor basis. And for the US investors, which dominated the book, the yield pick-up between the two transactions was healthier than the US corporate curve.
The deal clearly developed huge momentum, with participation by about 160 accounts, of which four placed orders for more than $100 million (none were from Asia) and about 15 placed orders for $50 million to $100 million. By geography, the US accounted for 50% of the $2.75 billion book, with Asia on 40% and Europe 10%. By investor type, funds took 57%, banks 23%, insurance companies 11%, retail 5%, corporates 2% and pension funds 2%.
At the time of pricing the group's outstanding $1 billion 7.75% 2011 bond was said to have been bid at about 113% to yield 198bp over Treasuries. This represented a 7bp to 10bp tightening on the Asian trading day, as momentum from the new deal spilled into the old. On a Libor basis, the 2011 was bid at about 210bp to 215bp over Libor, while the 2013 came at 200bp over Libor.
On a Treasuries basis a 39bp pick-up between the two transactions seemed generous against the US corporate credit curve, but aggressive compared to the Asian one. Observers report a 30bp to 45bp two-year yield pick-up for US corporate paper at the longer-end of the curve, but a steeper 40bp to 60bp one for Asia.
There is, for example, a 60bp differential between the Hutchison Whampoa 2011 and 2013 bonds and a 50bp differential between the Petronas 2012 and 2015 bonds.
Investors were said to have liked the deal for three main reasons. Firstly, there is some ratings momentum as PCCW-HKT is one of only two Asian corporate credits currently on positive outlook from Standard & Poor's. The group is rated BBB by S&P, BBB+/stable by Fitch and Baa2/stable by Moody's, which downgraded the group in May.
Secondly, observers say investors were comforted by management's re-affirmation of their intention to continue de-leveraging the balance sheet. During conference calls to market the new deal, for example, company officials said PCCW-HKT, the operating company, would not return to the international bond markets again in 2003.
Thirdly, investors were said to have given management credit for doing everything they said they would over the past couple of years. This would have been further underlined by the decision to maintain the deal size at $500 million even though demand easily justified an increase.
Key, now will be whether PCCW-HKT does continue to maintain a conservative financial stance and the rating agencies are encouraged to lift the group's credit rating. In May, Moody's said its decision to downgrade PCCW was mainly due to a resumption of acquisitive tendencies exemplified by its abortive bid for Cable & Wireless.
The downgrade also meant the 2011 bond suffered a 25bp coupon step-up, which will kick in this November. The new deal has no such provisions.
The group recently announced its intention to re-pay the final $395 million amount remaining on its $4.7 billion syndicated loan and $108 million of a HK$5 billion loan. This means there will no longer be a cap on the dividends PCCW-HKT is able to upstream to the parent, or on related transactions between the two companies.
Virtually every credit analyst who covers the group has queried whether it will be able to stop itself from hitting the acquisitive path.
In a credit report published earlier this year, HSBC concluded that, "The decision PCCW faces is a tough one. On the one hand, the company is faced with declining fixed line telephony revenues. On the other hand, it needs to make investments that will stem the decline. Clearly this would not be viewed favourably by the rating agencies nor bond holders as PCCW would likely have to assume additional debt, placing further pressure on its financials."
According to UBS estimates, PCCW-HKT currently has a $3.364 billion gross debt position, equating to a debt to EBITDA ratio of 3.1 times.
