CLP Power roadshows dollar benchmark

Presentations begin on Monday for a $300 million 10-year 144a issue.

Following the recent establishment of a $1.5 billion euro-MTN programme under the aegis of Morgan Stanley, the A+/A3 rated credit hopes to launch its first international dollar bond since April 1996 via joint leads HSBC, Morgan Stanley and Salomon Smith Barney.

The deal represents the first benchmark borrowing by a Hong Kong sovereign-rated credit since the end of 2000 and as such is expected to be well received by a market starved of much supply by any Asian high grade name. This factor in tandem with the group's defensive, utility style credit profile and huge retail bid from Hong Kong will almost certainly propel the deal towards tighter than expected pricing.

Based on current secondary market levels of high grade Hong Kong names, the offering should price to yield around 6.5% or roughly 130bp over Treasuries, subject to the imposition of a new issue premium. This is based on the fact that there is about 20bp per annum on the yield curve between five and 10-year paper.

CLP's existing 7.5% April 2006 issue is, for example, trading at 107% bid to yield 5.3% or 85bp over Treasuries. At this point of the curve, the main benchmark is provided by the MTR Corp which has an October 2005 transaction currently yielding 5.03% and against which CLP is trading a roughly 30bp premium.

At the longer end of the curve, the MTR Corp also has a November 2010 outstanding at 6.17% bid and the KCRC a November 2014 transaction at 6.45% bid or 125bp over Treasuries. However, between these two bonds the curve flattens to about 7bp per annum, potentially pricing a new MTR 10-year around the 6.31% mark or 110bp over Treasuries.

In its favour, CLP has one of the strongest credit profiles in Asia, a reflection of its monopoly status and protection under the Hong Kong government's Scheme of Control Agreement (SoC), which allows electricity suppliers to earn a maximum 15% return on assets.

Run by the Kadoorie family, CLP has the transmission and distribution rights for Kowloon, the New Territories, Lantau and a number of Hong Kong's other outlying islands, while its counterpart Hong Kong Electric controls Hong Kong island. Since both companies are privately owned, the Hong Kong government's ability to introduce any form of competition into the domestic power sector has been historically weak and the situation is compounded by the fact that CLP also owns 40% of CAPCO (Castle Peak Power), which generates its electricity as well.

The SoC has, therefore, been a huge and stable cash cow for CLP, which reported a debt to capitalisation ratio of only 14.1% at the December year-end and an interest cover ratio of 44 times. Excluding Capco, the group has a debt load of HK$15 billion ($1.92 billion), of which the outstanding Yankee bond comprises 16% of the total, term loans 14%, commercial paper 26% and money market instruments 44%.

In terms of maturity profile, 27% of the debt falls due during 2002 and the remaining 73% during years two to five. Of the total, 58% is denominated in Hong Kong dollars and 58% is floating rate, versus 42% fixed.

However, there are a number of issues which have been dampening the group's credit profile, not least of which is the fact that the SoC is due for review in 2003 and formally expires in 2008. Conscious that the government may revise the terms or take the more radical stem of introducing competition, CLP has been actively expanding its international portfolio in recent years. However, it has been a move, which has so far been a drag on earnings and introduced volatility to its revenue stream.

In 2001, CLP reported net profits of HK$6.25 billion ($803 million), of which the SoC contributed HK$5.4 billion, a 5.3% increase over the previous year. The second biggest contributor was property development up 29.7% to HK$1.4 billion, while non-SoC income declined 20.4% from HK$426 million to HK$339 million. The biggest culprit was the group's non-HK and non-China electricity operations, which recorded a loss of HK$318 million.

These assets are spread across the whole region from India, Indonesia, Thailand and Malaysia to Taiwan and finally Australia, where CLP purchased PowerGen's assets including Yallourn Energy.

But the rating agencies consistently highlight the group's stable credit profile. In its ratings assessment for the MTN programme, Standard & Poor's said that CLP Power's profile is characterised by, "a diversified fuel mix, favourable regime under the Scheme of Control agreement with the HK SAR and very strong financial operations."

Some analysts also believe that fears about the abolition of the SoC have been overplayed. In a recent report, HSBC analyst Vanessa Tang argued that, "a revised arrangement on CLP's and HKE's permitted return, as long as it is transparent should have a minimal impact on the companies' credit quality. We expect the two companies will continue to earn stable, predictable cash flows owing to the regulated nature of reforms."

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