A lesson in liability management

Philippine port operator ICTSI pulled off a neat trick last week, boosting its capital at the same time as cutting its interest costs.
General Santos, a port run by ICTSI
General Santos, a port run by ICTSI

For executives considering their funding options, the risk of an interest rate hike by the Federal Reserve cannot be overlooked. After strong retail sales and producer price data this week, as well as the release of the minutes of the Fed’s most recent meeting, most economists expect the US central bank to hike in December.

That is going to push up funding costs for Asian corporations, slowly bringing an end to the razor-thin dollar funding levels they have enjoyed for the last seven years.

But the party is not over just yet.

Asia’s bond market is booming. The region’s corporations are taking the opportunity to rush to the dollar bond market, making the most of cheap funding costs before it is too late. International Container Terminal Services (ICTSI) was a prominent example last week, when it managed to increase its hybrid capital base, lengthen its maturity profile — and still save several million dollars in interest costs each year.

The Philippine port operator — run by billionaire Enrique Razon — set out in early October with the goal of cleaning up its debt maturity profile. ICTSI had two corporate hybrid bonds outstanding, a $300 million 6.25% perpetual that comes callable in 2019 and a $450 million 5.5% perp that is first callable in 2021.

Between them, these two deals cost the company $43.5 million in interest payments a year. But since both were trading well above par, ICTSI’s chief financial officer Rafael Consing Jr decided to launch a tender offer for the two deals on October 3. He could pay for that, he calculated, with a new, cheaper deal.

But the belief that the good times would not last long in the debt markets was at the forefront of his mind.

“The most important goals for us were to lower our costs and extend the duration,” Consing told FinanceAsia in an interview.

“But the third part is the risk management aspect. It feels as if we’re at an inflection point right now. We may no longer enjoy these levels of interest rates, and even if interest rates do stay flat, my intuition tells me that spreads will widen anyway,” he added.

No new money

Consing and his team — as well as representatives from bookrunners Citi, HSBC and Standard Chartered — hit the road to pitch a new deal to investors in early October. They went to the usual venues for a Reg-S bond, meeting investors in Hong Kong, Singapore and London.

The roadshow took place at the same time that investors were considering whether or not to take part in a tender offer for the two outstanding bonds. In the end, investors holding $160.3 million of the $300 million deal accepted the tender, while $185.1 million of the $450 million bond was tendered.

The tender would only go through if the new issue was completed, however. On October 13, the same day that ICTSI closed its tender offer, the company launched a new deal.

Since the response on the roadshow was pretty good, ICTSI authorised its bankers to float initial price guidance of 5.25% for the new perpetual bond, which comes callable in May 2024. That sucked enough investors into the book for ICTSI to hit its target — and it ended up pricing a $375 million bond with a yield of 5%, off an issue price of 99.225 and a coupon of 4.875%.

The $375 million issue size of the new bond meant ICTSI had to use some cash on balance sheet to complete the tender. This is because on top of the $345.4 million of bonds tendered, the company had to pay the tender premium and the accrued interest, which brought the total cost to around $383 million.

“From the day we mandated the joint leads, we said we do not want to take any new money,” he said. “This was a capital management exercise, not a fund-raising exercise.”

Save and save again

The tender offer and new issue gives an eye-catching example to other CFOs in Asia considering their options, especially those with the credit strength to launch hybrid capital deals that could aid future growth. The rising expectation that US rates are up on their way up makes now as good a time as any for these issuers to come to the market.

But ICTSI has also showed a more nimble to approach to managing its capital structure more generally. In May, the company paid off the first hybrid bond it sold, a $350 million perpetual paying an 8.375% coupon. That bond had been used to fund a greenfield project in Mexico, but once the project became operational, it made sense to find a much cheaper source of funding.

By the call date, ICTSI had already turned to bank lenders for replacement capital, securing a $260 million 12 year facility that it could draw down to pay off the notes. The amortising loan cost 5.75%, a huge saving on what the Philippine company had paid to get the project started.

ICTSI’s saving this time was almost as impressive. By FinanceAsia’s calculations, before the tender offer the company was paying interest of $43.5 million a year for $750 million of hybrid capital.

It has now reduced the interest cost to $41.5 million a year at the same time as increasing its hybrid capital base to $779.6 million. More important from Consing’s point of view, ICTSI has also increased the duration of its liabilities. 

The cost-cutting capital management exercise has put ICTSI in a strong position, giving it enough “dry powder for transformational acquisitions,” according to Consing.

"There aren't many acquisition opportunities out there, but there are a few that we are looking at,” he said. “However, I can’t say which. I don’t want to give our competitors any clues.”

The bookrunners generated around $400 million of orders for the deal, which was sold through an SPV called Royal Capital.That is not a huge book for a $375 million transaction, but Consing defended the pricing as being calibrated to get the demand it needed.

The new bonds did fall slightly in the secondary market on its trading debut Friday, but a banker close to the transaction said that reflected a wider fall in prices during Asian trading hours.

Philippine investors — a rich source of demand for local issuers given their strong dollar holdings — took around 26% of the deal. Investors in the rest of Asia bought 56%, and those in Europe 18%. Fund managers were allocated 46%, private banks 30% and banks 24%. There was no private bank rebate.

This was not the first time that ICTSI has pulled off an impressive liability management exercise with perpetual bonds.

¬ Haymarket Media Limited. All rights reserved.

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