HK Airlines takes off with maiden perpetual bond

The HNA-backed airline raises $250 million as it joins a recent fundraising rush in the region. But turbulence in the aviation world means demand is cooler than for some issuers.

Hong Kong Airlines, controlled by China's acquisitive HNA Group, returned to the international bond markets on Friday, raising $250 million through the sale of a senior perpetual bond.

The airline, which is privately held and unrated, launched its debt sale three days after Richard Li’s insurer FWD Group sold a $250 million subordinated perpetual bond that captured more than $6.75 billion of demand.

However, interest in HK Airlines was far cooler, with the peak order book reaching $500 million – reflecting the challenging outlook for the aviation industry.

“The credit profile and industry risk of the two deals are very different, with the airline facing huge operating pressure,” a Singapore-based investor told FinanceAsia. “In addition to oil price volatility, rising competition among industry players and an unstable global economy are weighing on their profitability.”

“Conversely, insurers generally offer better transparency of their premiums income and investment style,” the portfolio manager added.

The lead managers did not release any statistics on Hong Kong Airlines’ latest dollar deal, citing a confidentiality agreement with the issuer.

One unusual feature of the Hong Kong Airlines perpetual was its maturity profile. While most callable perpetuals come up for redemption after three or five years, the airline set a first call-date of three and a half years — a move that syndicate bankers said was designed to avoid all of the company's outstanding bonds maturing in 2019.

The first call date for the perpetual bond is July 26, 2020, some 18 months after that of its $550 million senior bond, which pays a coupon of 6.9%.

Patient approach

"The issuer first met with investors about its perpetual bond issue in November," said a syndicate banker close to the deal. "Their patience paid off handsomely in terms of pricing and their funding objective."

The issuer included a 5% step-up after the first call, as well as another 5% step-up in the event of a change in its major shareholder, a covenant breach or a rise in the company's debt beyond a certain level.

“The issuer wants to expand its maturity profile and avoid paying back two outstanding bonds at the same time, therefore the perpetual bond is callable after three and a half years,” a syndicate banker told FinanceAsia.

The lead managers – Societe Generale, BOC International, CCB International, Credit Suisse, Guotai Junan International and Hong Kong International Securities – went out with initial price guidance the the 7.3% area, before tightening to 7.125%.

Final pricing was fixed at par to yield 7.125%. On Monday morning, there was little price movement as the bond will be settled only on Thursday (January 26).

The best comparable was HK Airlines' outstanding 6.9% 2019 bond, which was trading on a cash price of 101.875 to yield 5.89%. The maturity extension implied the bond ended up pricing around fair value, according to a syndicate banker on the deal.


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