City Telecom priced its high yield debut yesterday (January 13) raising a slightly increased $125 million from the 10 non call five deal. Under the lead management of Citigroup, the Ba3/BB- rated deal was priced at par with a coupon of 8.75% to yield 452bp over Treasuries. Fees were 1.75%.
Pricing was in line with guidance released earlier this week when the deal was accelerated to take advantage of momentum building in the order book. The deal ended up closing at the $500 million level, prompting an increase from the base deal size of $110 million.
Some 79 investors are said to have participated, of which 70% were asset managers, 25% private banks and 5% banks. Geographically the book split 47% Asia, 35% US and 18% Europe.
At first glance, pricing appears relatively generous compared to Asian high yield deals priced at the end of last year. However, the deal is longer than the string of seven-years, which hit the market during the fourth quarter.
This in turn dampened demand from many Asian accounts, which have seven-year limits and meant that City Telecom had to rely more heavily on the US where investors always demand a pricing premium.
In terms of the group's nearest rated Asian comparable, pricing makes more sense. A shorter 2011 bond for Asia Aluminium is currently yielding about 8.1%, slightly up from last week's 7.9% level.
This deal also has a one notch high rating from Standard & Poor's of BB. It has the same Ba3 rating as City Telecom from Moody's.
In addition, City Telecom incorporated a series of call features into its deal, which are estimated to have cost it up to 40bp in pricing. Should the company want to retire some of the debt by issuing new equity, it has an option to redeem up to 35% before February 1 2008 at a price of 108.75%.
From 2010 there are also staggered call features. On February 1 2010 it can call the bond at 104.375%, dropping to 102.917% in 2011, 101.458% in 2012 and par in 2013.
Proceeds are being used to fund the group's HK$1.5 billion ($192 million) capex programme to expand its fibre optic network. Pre deal, the group had a debt to EBITDA ratio of 0.4 times, but this is expected to increase quite dramatically over the next year.
As such, the deal incorporates standard high yield covenants including a limitation of indebtedness at 4.25 times. In its ratings release Moody's said that any level above 4.5 times might provoke a ratings downgrade, whilst any level below three times might prompt an upgrade.
Completion of the deal shows that a wide variety of Asian high yield credits are now gaining traction with investors. Specialists report that luncheons in Hong Kong and Singapore were both full, with numerous questions from the floor in both cities.
Analysts describe City Telecom as an interesting and dynamic company, which has come a long way in a very short period of time. Having started life as the Territory's second IDD player, it has since mutated into fixed line (2002), pay-TV (2003) and VoIP (2004).
It currently ranks second to PCCW-HKT in IDD and third in broadband, again behind PCCW-HKT and i-Cable.