CLP Power lights the way

Hong Kong''s dominant electricity supplier sets an exceptionally tight benchmark for itself.

Pricing of the A+/A3 rated credit's new 10-year bond has not only come through its own interpolated curve, but also those of sovereign proxies MTR Corp and KCRC. Although no domestic borrower has ever priced or traded through the two train operators before, CLP Power was able to amass an order book of $2.5 billion and squeeze pricing 5bp through their theoretical secondary market trading levels.

Led by HSBC, Morgan Stanley and Salomon Smith Barney, the company launched a $300 million issue last night (Wednesday) on an issue price of 99.397% and semi-annual coupon of 6.236% to yield 105bp over Treasuries. Fees were an equally tight 25bp.

With books 8.3 times covered, a total of 160 accounts participated, with a geographical split which saw about 68% of bonds placed in Asia and 32% placed in Europe. Asian demand further broke down to 55% Hong Kong, 30% Singapore, 5% Japan, 5% China and 5% other.

In terms of investor type, banks accounted for roughly 55%, with asset managers on 18%, private banking 14% and others (including insurance funds and corporates) 13%.

The reasons for the group's unequivocal success were many. The issue size was small. The borrower has not issued since 1996. It is a defensive utility credit. No Hong Kong sovereign rated entity has come to the public dollar markets since November 2000. Domestic investors regarded it as a must hold and finally the company has impressive stand-alone financial ratios capped only by the sovereign ceiling.

In the secondary market, CLP Power's existing 7.5% April 2006 transaction closed Asian trading yesterday at a bid yield of 5.38% or 85bp over Treasuries - a roughly 30bp premium to the MTR Corp's comparable October 2005 issue. Bankers, however, say that the bond is highly illiquid, with CLP more likely to be quoted at a 10bp premium to MTR Corp in the private placement market.

At the longer-end of the Hong Kong credit curve, MTR Corp and KCRC have eight and 12-year bonds outstanding. At the close of trading, the former's November 2010 was bid at 6.16% to yield 98bp over Treasuries, while the latter's November 2014 bond was bid at 6.44% to yield 125bp over Treasuries. With 7bp on the curve between the two, a new 10-year MTR or KCRC deal should price around the 6.3% mark or 110bp over Treasuries, while a new CLP should have priced at least 10bp wider.

CLP Power Hong Kong is the flagship of CLP Holdings, which also incorporates a property company, a substantial international portfolio and a generation business through Castle Peak Power (Capco). CLP Power is the transmission and distribution network of the group serving over 70% of Hong Kong's electricity demand and an area spanning Kowloon, the New Territories, Lantau and a number of outlying islands. Its counterpart, Hong Kong Electric, operates across Hong Kong island.

Run by the Kadoorie family, the company reported a debt to capitalization ratio of 14.1% at year-end and an interest coverage ratio of 44 times. Total debt amounted to HK$15 billion ($1.92 billion).

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