Korean broadband operator Hanaro Telecom completed its debut international bond issue on Tuesday (January 25) raising $500 million from a seven-year deal led by JPMorgan and UBS.
Many believe the strength of deal's $3 billion order book underscores a pendulum swing away from the pricing power of US investors. Indeed, the deal's success marks a complete turnaround from last summer when the lack of an Asian bid and a reluctant US bid made execution of any high yield deal extremely difficult.
Bankers argue that Hanaro's deal shows that Asian issuers now have the upper hand. Backed by a strong bid from their home region, they can avoid the onerous listing and regulatory requirements of a US-targeted deal and can structure a far more flexible covenants package.
As such the deal has no US registration and has not incorporated the standard high yield covenants package most US high yield investors would expect. For example, the threshold for a change of control put option has been set at 40%, double the standard requirement in the US.
Nevertheless the deal closed six times oversubscribed with participation by just over 200 investors. The order book was evenly split between the US 39%, Asia 36% and Europe 25%. Only about 3% of the deal went to Korea.
By investor type, 71% went to asset managers, 12% to retail, 13% to banks and 4% to insurance companies.
"Before, high yield deals needed US high yield investors," says one specialist. "That's no longer the case with strong demand now coming from Asian and emerging market investors. But the US high yield guys are coming in anyway because they see these deals have good momentum and they need to diversify away from US credits, which are trading at such tight levels."
Hanaro priced its deal at 99.32% on a coupon of 7% to yield 7.125%. This equates to 314bp over Treasuries. Fees were 1.2%.
The main comparable for the Ba2/BB rated deal is LG Telecom, which has a one notch higher rating of BB+ from Standard & Poors, but the same Ba2 rating from Moody's.
The Korean cellular operator has a $200 million 8.75% September 2009 bond outstanding that was bid around 6.55% at the time of pricing. Bankers estimate that a new seven-year LGT deal would price about 50bp wider.
This means Hanaro has priced flat to LGT even though its deal size is much bigger and its rating slightly weaker. But specialists say investors view Hanaro as a cross-over credit and believe the rating agencies did not accord the company's fundamental financial strengths enough weight in their ratings assessment.
It is, for example, far less highly leveraged that LGT. Hanaro had a debt to EBITDA ratio of 1.9 times in September 2004 compared to just under four times at LGT. However, Hanaro's low debt levels are the result of an equity injection in November 2003. Prior to this the company's debt to EBITDA ratio was running at 4.6 times.
In its ratings release, Moody's said that it might upgrade the rating if the company is able to keep the ratio below two times on a sustainable basis.
As a result of the equity injection, a foreign consortium led by AIG and Newbridge gained a controlling 39.6% stake in the company. Specialists believe their short operating history is one of the reasons why Hanaro's rating was lower than expected. LGT by contrast benefits from the halo effect of the LG group.
In November 2004, Hanaro secured a $600 million credit facility to prepare for its $485 million bid to acquire rival broadband operator Thrunet. This was successful and the acquisition is expected to be completed by the end of the first half of 2005. It will increase Hanaro's market share from 24% to 35%. Korea's dominant operator, Korea Telecom, has a 51% market share.
Analysts say the potential for sustained revenue growth is slim as Korea has the world's highest broadband penetration rate - 76.8%. However, the country has not yet introduced VoIP (Voice Over Internet Protocol - ie telephone calls via the internet) and analysts expect this to provide the company's next major revenue driver.