The choice of the three banks comes as no great surprise to most market participants, although the decision to incorporate three banks rather than two was unexpected. Merrill Lynch had always seemed assured of one slot given that it had missed out on the A3/A-rated train operator's recent privatization because it acted as financial advisor to the government for the sale instead.
The main uncertainty surrounded whether the three banks that led the IPO - Goldman, HSBC and UBS Warburg - would be precluded from the bond deal, having already benefited from fees generated out of the equity markets. In the end, however, MTR officials appear to have remained true to form and stuck with those banks whose strategic advice they have successfully relied upon in the past.
Market participants expect the transaction to be well received despite coming up against continuing global volatility that has dramatically slimmed down the international bond pipeline and been particularly disruptive in the corporate sector, where spreads have been hardest hit.
Yet as one observer comments, "A good name, with the right strategy and good execution is going to get done and will stand out much more prominently in this kind of market because there is nothing else around."
The decision to proceed is likely to reflect the fact that Hong Kong benchmark spreads have been fairly rangebound over the past couple of weeks and have even shown a slight tightening bias over the past few days. Observers also note that widening international credit spreads have been offset by rallies in the Treasury market. "Every time the equity markets crater, there seems to be a corresponding improvement in Treasuries," says one. "So even if credit spreads do go out by a couple of basis points, the overall effect is pretty neutral."
Asian bankers also argue that although many European and US benchmark single-A OECD style credits have widened, they only present an indirect reference point for an issuer like MTRC.
"International spreads have been widening because we've been seeing some very large transactions from the likes of Deutsche Telekom [$14 billion] and Unilever [$7 billion]," one trader states. "These corporates, and particularly those in the telecoms sector, have needed big deals and have had to pay up for them because investors have been in control of pricing."
But he adds, "MTRC isn't raising a particularly large sum of money and it doesn't need the funds. Dedicated Asian bond funds also have cash to invest and are not interested in the likes of KPN, Ford and their ilk. They want quality paper from Asia and there is little more highly regarded than this credit."
Collapsing spreads in the Philippines are also said to have had a slight impact, with bankers highlighting a flight to quality by investors in the region. "There's a lot of money that's moved out of the Philippines and is looking for a safer home," one market participant comments.
MTRC's outstanding $750 million 7.5% February 2009 bond is currently trading around the 187bp/178bp level, pretty much flat to the Kowloon Canton Railway Corporation (KCRC), whose 7.25% July 2009 is quoted at 188bp/180bp. Similarly, the Republic of China's 7.3% December 2008 bond has a bid/offer spread of 175bp/165bp.
Fund managers say that the new deal should be highly appealing on an asset swap basis. One account recalls purchasing the KCRC's 2010 bond at a re-offer price of 170bp over Treasuries, equating to 60bp on a swapped basis at the time of the $1 billion deal's launch in mid March. For the MTRC, accounts are expecting a Libor level around the mid 70bp level based on price expectations against Treasuries round the mid to high 180bp mark.
For the company itself, one of the main reasons for coming to the market now is to capitalize on the positive sentiment generated by its flotation last month. Having recently updated documentation and increased its US shelf from $250 million to $1 billion, it is ready to proceed and is aiming for an accelerated launch schedule rather than lengthy roadshows.
"They don't want to be held hostage to deteriorating market conditions and everybody is extremely familiar with the credit given the acres of print generated during its privatization," says one fund manager. "We've been told they'll hit the button over the next two days."
