Hutchison Whampoa became the first Asian borrower to issue a euro-denominated perpetual when it closed a €1.75 billion ($2.3 billion) perpetual on Tuesday night. The perpetual offered a coupon of 3.75% — which was the lowest coupon for a perpetual from an Asian borrower.
According to a source, more Asian borrowers could turn to the euro to issue hybrids, though Hutchison was helped by the fact that it already has euro-denominated senior bonds and is a name that European investors are familiar with.
This is the third hybrid issued by the conglomerate, which is controlled by Li Ka-shing, so it is clearly a part of the company’s funding strategy, and allows it to keep its debt levels down, without issuing new shares.
Hutch is rated A3/A-/A-, the lowest single-A rating, and it does have an incentive to keep its rating from falling any further. Moody’s recently took it off negative watch, so its credit profile has been improving. However, it has also committed itself to meeting certain targets.
According to analysts, Hutch plans to double its recurring earnings per share and maintain its net debt to net capital ratio at 25%. At the same time, it has also been acquisitive. It recently completed its acquisition of Orange Austria and there have been reports that Telecom Italia is considering a merger with Hutch’s subsidiary 3Italia.
In its latest deal, Hutchison has opted for a staggered step up, or so-called “cliff structure” similar to the structure used for Li & Fung and Agile Properties. There is a 25bp step up from the tenth year and an additional 75bp step-up from the 25-year. Unlike its dollar hybrid, there is no replacement capital covenant, which requires the borrower to replace the hybrid with an instrument of similar equity content if it calls the hybrid.
The issue gets 50% equity credit from the three rating agencies but Standard & Poor’s equity credit falls away after five years, which investors viewed as a strong incentive for Hutch to call the bonds. In the end, the question boiled down to how important S&P’s equity credit is to Hutch, and based on the tight pricing, investors clearly took the view that Hutch would call the bonds at the fifth year.
Hutch’s outstanding 6% callable 2017s were trading at a yield of 3.55% and its euro perpetual, which is callable in 2018, priced to yield 3.75%, about 20bp back of that. This worked out to be about 294.1bp over mid-swaps.
The distribution is fixed for the first five years and resets at the fifth year and every five years. The bonds were wrapped around par in secondary trade. The issue is rated Baa2/BBB/BBB.
In terms of distribution, UK and Ireland were allocated 28%, Germany and Austria 28%, Benelux 13%, Switzerland 9%. France 9%, Scandinavia 5%, Italy 4%, Asia 3% and other investors 1%. Fund managers were allocated 77%, insurance and pension funds 11%, banks and private banks 10%, other investors 1% and hedge funds 1%.
Bank of America Merrill Lynch, HSBC and Goldman Sachs were joint bookrunners.
