Long considered Hong Kong's proxy sovereign issuer, MTR Corp also typically vies with China for the tightest spread level among non-Japan Asia's sovereign credit spectrum. Most bankers consequently agree that getting a prospective deal right does not so much depend on resolving particular credit issues, but finding the right launch window before the end of the year.
"It is all a matter of getting the timing right and especially in the kind of sentiment-driven bond markets we are seeing at the moment," says one observer.
"If market conditions remain as they are then they won't come," a second adds. "However, if the international markets snap back, they'll move forwards to take advantage of it."
In terms of pricing, there are already plenty of existing benchmarks. The group's current benchmark $750 million 7.5% February 2009 bond, for example, is trading at a bid/offer spread of 186bp/172bp. Similarly the Kowloon Railway Corporation (KCRC) has two benchmarks, comprising a 7.25% July 2009 trading at 196bp/182bp and an 8% March 2010 at 195bp/183bp.
Republic of China spreads are also considered a key pricing determinant, with the PRC's benchmark 7.3% December 2008 bond presently trading slightly inside MTRC levels at 175bp/160bp.
Bankers argue that a new offering should be able to price about 5bp to 10bp back of the existing 2009 line. "There's probably about 5bp to 10bp on the curve for the additional year and the strength of the credit should negate the need for a new issue premium," one banker comments.
He adds, "This is such a strong name and one that will secure a very strong backstop bid from Asia. The privatization has generated a lot of interest in the group and this should follow through into the bond deal as well."
Bankers also report that recent market volatility has resulted in a shift out of higher yielding credits into defensive investment grade plays. "There's less credit event risk with the MTR," one head of DCM notes. "There's also been a discernible flight to quality in Asia."
Supply/demand dynamics stand heavily in the group's favour. Fund managers with strong cash positions have been looking for value credits in which to invest, but have been starved of a meaningful primary markets pipeline all year. Few would also deny the rationale for a deal that seeks to maximize the positive spin from the government's successful divestment late last month.
In particular, the afterglow in Asia should help to lever down any pricing premium demanded by US investors. Indeed, the one negative cited by investment bankers is the tightness of the group's spreads relative to other single-A credits. As one explains, "Global investors that can buy single-A credits can do so in any country on the globe. In this respect, MTRC is looking expensive relative to its peers."
Similarly rated telecom credits such as KPN, for instance, have seen spreads widen out under the burden of the massive cost of Europe's 3G licenses, with the Dutch group's new 10 year Eurobond being quoted at 258bp/255bp. Other Euromarket stalwarts such as A2-rated Ford Motor have also seen spreads widen in tandem with plummeting equity markets and an exacerbated oil crisis. The auto company's recent 2010 bond also has a two handle on it and was quoted at the beginning of this week at 215bp/195bp.
As part of its diversification strategy, the MTRC traditionally likes to achieved balanced global placement and ensure the widest possible distribution by keeping ticket size small. Last time round, however, although it did manage to achieve both these goals, it still found itself hamstrung by the pricing demands of US investors. In Hong Kong, where observers were used to seeing the group command much tighter pricing levels in the syndicated loan markets, there was a strong echo of disappointment.
After delaying its market return for several months because it wasn't satisfied with potential spread levels around the 200bp market, the group eventually managed to pick just the wrong moment for its comeback. Investor presentations in the middle of January 1999 coincided with renewed speculation about a currency devaluation on the Mainland that pushed all Greater China spreads wider.
In the end, the Goldman Sachs and Merrill Lynch led deal was priced at 99.584 to yield 287.5bp over Treasuries on a 10 year maturity. Co-managers were Chase, HSBC, JP Morgan and Lehman Brothers. For investment grade accounts, it was the first time that many had come back to Asia since the beginning of the Asian crisis and the majority still had one eye firmly trained on events in the People's Republic.
The two investment banks which ran the 1999 deal both have strong relationships with the group and remain among the front runners for the new deal. This is particularly the case for Merrill Lynch, which missed out on the company's privatization because it was acting as financial advisor to the government. Three banks comprising Goldman Sachs, HSBC and UBS Warburg co-ordinated the IPO and all three are believed to be bidding for the new deal, although individual banks refused to comment.
From a credit standpoint, MTR has won many plaudits for its liability management capabilities and maintains very limited foreign exchange risk, with over 70% of its outstanding debt held or swapped back into Hong Kong dollars. It also aims to maintain a smooth and extended yield curve to match the long-term nature of its projects, with the result that about 40 % of debt is longer than five years in maturity.
As of 30 June 2000, gearing stood at about 54%, while the group had a debt to EBITDA ratio of 6.99 times and a net interest coverage ratio of 3.05 times. Total debt stood at HK$25.591 billion ($3.28 billion). EBITDA for the first six months also rose 11.3% to HK$1.831 billion, although net income fell by 8.4% to HK$1.051 billion because of declining property revenues.
