The three-year transaction not only ranks as the standout deal in its category, but across the wider capital markets as well. Within the space of its accelerated, 10-hour launch period on September 11, the issue managed to completely re-define the Asian equity-linked market and re-shape the kind of pricing levels available to the region's top borrowers.
For most of its history, the sector has suffered something of a reputation problem in the eyes of global investors. Too often in the past, boom/bust cycles have been engendered by a preponderance of second tier issues jamming the market with mis-priced deals that fail to withstand the next market downturn.
Hutchison, by contrast, may have marked a turning point and the longed-for arrival of Asia's tier one companies. Indeed, lead manager Merrill Lynch has since argued that its key achievement was to bring global pricing standards to an Asian deal and show one of the region's most highly esteemed companies that an equity-linked transaction could provide a cost-effective addition to its fund raising arsenal.
Where, for example, a bond floor of 90 to 95 would have previously been the norm to appease investors hoping to mitigate downside risk, Hutchison achieved an 87 level in line with European pricing levels. So too, where a conversion premium of 15% to 20% had been standard, Hutchison achieved a 32.5 % premium to London's close on the day of pricing - the highest on record for a company in the region.
Three times the size of its nearest rival, the transaction is Asia's largest by some margin and in a global context, ranks as the second largest dollar denominated transaction on record and the largest ever underwritten transaction. For Hutchison, an exchangeable structure enabled the company to monetize part of its Vodafone stake in a fashion that either allowed the stock to be sold at a significant premium should the deal be converted, or achieve $3 billion of funding at about one-third of its borrowing costs in the straight debt markets.
According to the lead, a bond floor of 87 saved the company about 5% of its usual borrowing costs, or about $150 million in interest savings per annum. By contrast, a bond floor around the 95 level would have saved 1% to 2%.
For investors, the transaction appealed because it married Hong Kong's strongest credit with Europe's most prominent and heavily traded wireless stock. Bond investors liked the shortened, three-year maturity since this gives issues more of a fixed-income tilt, while for large holders of Vodafone stock it offered a defensive hedge.
Where Merrill Lynch won most plaudits, however, was for its execution capabilities. One of the key considerations to make such a large transaction work was to ensure that delta hedging would not be a destabilizing influence on the stock at launch.
To counter the expected volatility and comfort the market, the bank consequently decided to launch an Accelerated Global Tender (AGT) of $500 million borrowed (secondary) Vodafone stock simultaneous to the exchange. Marking a first for both Asia and Europe, the move placed a short in the market that enabled investors to hedge without exerting additional pressure.
The deal was formally closed as New York opened, leaving unsatisfied demand to filter through to the secondary market, where the deal immediately traded up to 101.45.
With proceeds adding to Hutchison's growing cash pile, the deal further cemented a trend that is becoming increasingly evident in Europe, where exchangeables have become a popular means to dispose of unwanted stock created by the massive wave of corporate restructuring taking place across the Continent.
Rather than sit on a passive stake, Hutchison decided that it would be able to generate higher returns from investing the proceeds in its own 3G projects. As Ajmal Rahman, Merrill's Asian head of ECM, concluded at the time: "It's all about being well positioned to take advantage of opportunities in an exciting sector where the landscape is continuously being re-drawn."
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