Airport Authority readies first dollar benchmark

An RFP (request for proposals) is due today (Tuesday) for a $350 million bond.

The Hong Kong International Airport (HKIA) is set to launch its first fixed rate transaction with plans for a 10-year strategic benchmark. Timing could hardly be better for the A+ sovereign rated borrower given the complete dearth of quasi sovereign or corporate issuance from Hong Kong, the tight trading levels of outstanding comparables and the low interest rate environment. Mandate and launch is expected to be fairly rapid and the deal is likely to be either a two or three hander.

As ratings advisor, Goldman Sachs should be in pole position to win one of the slots.

Debt capital market specialists argue that although HKIA is never likely to be as frequent an issuer as either the MTR Corp or KCRC, its novelty value will make it more highly prized. A number also believe that on a fundamentals basis, HKIA makes a better sovereign proxy than either of the two public transport operators.

As one fixed income analyst says, "HKIA has a very strong quasi sovereign profile. It's a much cleaner credit than the two train operators because it does not have a huge property profile and its business fits the economic and strategic initiatives of the Hong Kong government. By this I mean that it's a services business dealing in logistics and human capital, with a future tied to the growth opportunities of the Pearl River Delta."

In terms of credit ratios, HKIA is also more conservatively geared than both MTR Corp and KCRC, and as of March 2002 had a net debt to capitalization ratio of 23.2% and net debt to equity ratio of 1:4.3.

Having accessed both the syndicated loan and Hong Kong dollar markets, a dollar benchmark is an obvious next step and will help term out the operator's short-term maturity profile. At the end of the last Financial Year in March 2002, HKIA had HK$8.45 billion in debt ($1.08 billion) of which 67% fell due in under two years, with a further 15% due within four years and the remaining 18% within five years.

A successful deal should see the company set a new record for the lowest outstanding coupon in the Greater China universe and lowest coupon for any Asian credit in the 10-year sector. Bankers say the key pricing issue will be whether HKIA can break the 100bp mark over Treasuries, which would imply a coupon of around 5.25%.

The most recent outstanding comparables are a May 2012 issue by China Light & Power (CLP), currently trading at 95bp over Treasuries and a March 2012 issue by CNOOC trading at 99bp over. The steepness of the credit curve alone implies a Treasury spread around the 110bp mark for a one-year extension. However as CLP showed last spring, investors' desire for high quality Hong Kong credits can bring pricing through the quasi sovereign curve and dispense with the need for a new issue premium.

The electricity priced its then 10-year deal 5bp through the implied trading levels of the MTR Corp and KCRC curve, but has not been subject to the same spread tightening since then. Heavy asset swapping and the age of the train operators' existing bonds, means that both are trading at very tight levels. The MTR Corp's November 2010, for example, was trading at 50bp bid yesterday.

Credit analysts say that HKIA's biggest challenge is managing the threat from China, where there are now four competing airports in the Pearl River Delta - Shenzhen, Guangzhou, Macau and Zhuhai (China's largest by capacity). Passenger traffic from Hong Kong is already being lost to Shenzhen, where it is much cheaper to get domestic flights and more dangerously, HKIA could lose lucrative transit traffic from Mainland passengers travelling overseas.

However, the airport has long acknowledged the threat and as part of its 20-year master plan says it wants to be the, "engine of growth" for the Pearl River Delta area and create links with neighbouring airports. As part of the plan, a Mainland coach service was opened earlier this month to ferry passengers to and from Hong Kong and Shenzhen airports.

At the end of the 2002 calendar year, HKIA said that passenger volumes rose 3.8% to 34.32 million passengers and cargo volumes 19.6% to 2.848 million tones. The airport has capacity for 87 million passengers and nine million tones of cargo. It is now embarking on phase two of its expansion plan with HK$4.299 billion ($558 million) budgeted to build a second runway.

Last March, the airport also announced its second full year of profits, with net income rising from HK$71 million ($9 million) to HK$236 million ($30.3 million). The majority of its income derives from airport charges (44%) and commercial revenues (36%).

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