Li Ka-shing’s Cheung Kong Holdings is set to test the market with the first Hong Kong dollar-denominated corporate perpetual. The company plans to issue a senior perpetual non-call-five benchmark and it concludes a two-day roadshow in Hong Kong today. DBS is the sole arranger.
The perpetual is similar to the S$730 million senior perpetual Cheung Kong issued in the Singapore dollar bond market, with one main difference — an investor friendly one-time 100bp step-up at the fifth year if the bonds are not called, which was not present in the Sing dollar perp.
While the Sing dollar has appreciated this year, there are fewer expectations of currency appreciation for the Hong Kong dollar, which is pegged to the US dollar. However, in other respects, Cheung Kong's Hong Kong dollar perp is very similar to the Sing dollar version. For example, there will be no rate reset and both perps are senior.
According to bankers, the benefit of holding a senior perpetual is that senior perpetual claims rank on par with other senior debt in the event of liquidation, even if the senior perpetual is issued through a special purpose vehicle. However, in reality, prior to the liquidation stage, senior bondholders have more courses of action than perpetual holders.
“Companies rarely go into liquidation overnight,” said one banker. “If a company starts missing coupons, senior bondholders can get their debt restructured and so on, but perpetual holders are unable to take that course of action as their distributions can be deferred. So, in theory, while both claims rank on par in the event of a liquidation, by that time, much of its assets may already be pledged away.” In addition, senior perpetual holders face extension risk past the call date.
As it is the first Hong Kong dollar-denominated corporate perpetual, bankers are watching closely to see how it will be received, and where it will price. “There are no corporate perpetuals in the Hong Kong dollar bond market, so it will be interesting to see where investors think fair value for a perpetual is,” said a source.
Given the lack of Hong Kong dollar perpetuals, bankers are pointing to recent Cheung Kong issues as comparables. Earlier this month, it privately placed a $500 million three-year floating rate note at Libor plus 150bp. This translates to Hibor plus 160bp or a yield of 2.21%. (Cheung Kong’s FRN was viewed by the broader market to have priced very tightly.) Meanwhile, Cheung Kong’s Hong Kong dollar 2021 is yielding 3.35%. Others point to Cheung Kong Infrastructure’s 2010 US dollar perpetual, which is currently yielding about 7.1% as a comp, although CKI is rated and Cheung Kong is not.
Given its lack of a rating, some bankers also suggest that Cheung Kong could have offered investors a bigger step-up than 100bp. Other unrated issuers such as Philippine port operator ICTSI, for example, offered investors a 250bp step-up.
The hybrid is expected to target private banking accounts. The Hong Kong dollar bond market is very much a reverse enquiry, illiquid market and, according to one investor, given the structure and lack of a credit rating, the hybrid is not eligible for local MPF funds.
“At this stage I have not seen any pricing indications but there are now plenty of Cheung Kong, Cheung Kong Infrastructure and Hutch bonds available in various currencies and structures, so plenty of choice elsewhere,” said one Hong Kong-based fund manager.