Cheung Kong hybrid

CKI further innovates with unique hybrid structure

Cheung Kong Infrastructure’s new corporate hybrid uses equity upside to increase the probability of a call.
Li Ka-shing, chairman of Cheung Kong
Li Ka-shing, chairman of Cheung Kong

Cheung Kong Infrastructure (CKI), one of Li Ka-shing’s flagship companies, is no stranger to innovation. In 2010, it re-opened the Asian hybrid market after a hiatus of more than a decade with a $1 billion corporate hybrid, and it has now returned with another novel hybrid.

The deal will be marketed to Asian and European investors starting from today and is expected to raise up to $500 million. The structure is designed to meet the needs of both the company and its investors. In CKI’s case, it is said to be keen to raise its free float in the market and also has concerns about debt levels after an acquisitive streak that saw it buy the UK’s Northumbrian Water in October last year. It is also said to be eyeing utility assets in Europe.

CKI is the biggest publicly listed infrastructure company in Hong Kong, with a market capitalisation of HK$101.7 billion ($13.1 billion). Goldman Sachs and J.P. Morgan are joint bookrunners. Goldman Sachs is the sole structuring adviser.

The structure of its latest hybrid is unique in two ways: CKI is creating a synthetic maturity based on the level that its share price is expected to trade at in five years’ time, instead of through a rate reset or a coupon step-up; and its hybrids are callable in two years instead of five.

The hybrids are on par with CKI’s previous hybrid, which is currently yielding about 7.3%. Assuming it raises the maximum of $500 million through the hybrid, CKI will keep $500 million worth of shares (based on the share price at the time of pricing) with the fiduciary, namely The Bank of New York Mellon.

The company will have the option to call the bonds back at par from the second year. If CKI’s share price has risen above current levels by then, the company has a strong incentive to call the hybrids. “There is no mandatory redemption,” said one person familiar with the deal. “But the incentive to call is much stronger than a reset or step-up as CKI will not allow investors to reap the upside of a share rally.”

This structure is aimed at removing investors’ uncertainty over the redemption date. “A lot of perpetuals are trading below par because investors are uncertain when the bonds will be redeemed. Hutch’s hybrid was designed this way to give them more comfort,” he added.

Investors also have the option to convert their bonds into shares after five years. However, if the shares are trading below current levels, it makes sense for them to wait for the shares to rise, and for the company to redeem the bonds at par.

“If the share price rises, investors will want to convert their bonds into equity. However, the company will not let them do that. It will call the bonds back,” said the person familiar with the deal. “On the other hand, if the share price falls, investors will not want to convert their bonds to equity. They will wait for the company to buy them back at par.”

The hybrids receive 100% equity treatment for accounting purposes and zero equity treatment from the rating agencies. However, CKI’s bank covenants are said to follow accounting standards and, hence, the deal makes sense for the company.

It was also structured this way as CKI is keen to issue more equity to increase its free float. Hutchison Whampoa controls about 81.5% of CKI and the stock is not very liquid. In July last year, CKI launched a HK$3.41 billion top-up placement through Goldman Sachs that accounted for 25% of the company’s free float.

One rival noted that CKI is venturing into new territory for corporate perpetuals. “It is interesting as CKI is just using the equity upside to increase the probability of call,” said the person away from the deal. “Bond investors will have to take a call on where they expect the shares to trade in five years.”

“I can’t see too many other issuers replicating it as most don’t want to be diluted, but let’s see how it goes. It would have been easier just to put a big step-up at the fifth year, but I guess they want a true perpetual with a fixed rate in case they can’t issue equity at a higher price in the future,” he added.

CKI’s perpetual has no rate reset or coupon step-up. The company is rated A- by Standard & Poor’s and Fitch. Investor meetings will be held in Hong Kong on Tuesday and Wednesday, in London on Wednesday and Singapore on Thursday.

Cheung Kong Infrastructure has investments in energy, transportation, water utilities and infrastructure-related businesses in Hong Kong, China, New Zealand, Australia, Canada and the UK.

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