Hong Kong Telecom sold a $500 million 10-year bond late on Monday as it pressed ahead with a liability management programme that aims to improve its debt profile and lower its funding costs.
Rated Baa2/BBB by Moody’s and Standard & Poor’s, the Reg-S offering priced at US Treasuries plus 178 basis points, which is 17bp tighter than initial price guidance, according to a term sheet seen by FinanceAsia.
The investment-grade note, which is guaranteed by HKT Group and Hong Kong Telecommunications, has a coupon of 3.625%. Despite no roadshow, orderbooks reached in excess of $4 billion when it priced from more than 270 accounts, up from a Hong Kong mid-afternoon figure of $3.5 billion, buoyed by the scarcity factor of the credit.
Asian investors purchased 79% of the notes while the rest went into European accounts. Fund managers, sovereigns and central banks subscribed to 77% of the paper, followed by insurers and private banks with 8% each, and financial institutions 7%.
With it, HKT hopes to proactively extend the maturity of its debt profile as well as continue to reduce the group’s overall effective interest rate — which fell to 2.5% from 3% in 2014, a source familiar with the matter told FinanceAsia.
In a report published on Monday, Moody’s appeared to support the company's move. “The transaction will materially term out HKT Limited's debt maturity profile, a development which will be credit-positive," Gloria Tsuen, a credit analyst at Moody’s, said.
HKT reduced its total debt by HK$7.5 billion ($970 million) to HK$36.4 billion from June 2014 to the end of that financial year. It also locked in attractively priced long-term funding in January, when it raised a $300 million zero-coupon bond.
The company has $1 billion worth of bonds maturing this year and next — $500 million in July 2015 and another $500 million in February 2016, according to its financial statements.
The still-low US interest rate environment has encouraged opportunistic but good-quality Asian issuers to tap the dollar bond market.
The 10-year US Treasury yield touched a six-week low of 1.89% on March 24 and has since trended up, reaching 1.96% on Monday, according to Bloomberg data. But this is still well below the 3% level seen last January.
Additionally, there is still ample liquidity and strong investor appetite around the region, notably for investment-grade credit, fixed income analysts said.
“We think the issuance pattern so far this year indicates that there is strong demand for credit, though investors are overall cautious about moving too far down the credit curve,” Kenneth Ho, credit analyst at Goldman Sachs, said, adding that the region saw $2.65 billion of new issuance last week, all of which came from investment-grade names.
The nearest comparables for HKT’s new bond includes its outstanding 10-year note expiring in March 2023. It was trading at a cash price of around 100.908 to 101.714 or a yield-to-maturity of 3.617% in Asian morning trade on Monday, according to Bloomberg bond data. This translates to a G-spread of 179bp.
After taking into consideration the extension of the credit curve, fair value would come at approximately Treasuries plus 185bp, meaning a generous concession of 10bp based on its initial price guidance, according to a source close to the deal.
The issuer also has a note maturing in April 2022, which traded at a cash price of 109.8 to 110.639, for a yield of 4.132%, Bloomberg data showed.
HKT, which operates the biggest mobile and fixed-line telecommunications network in Hong Kong, is a subsidiary of the flagship conglomerate of billionaire Richard Li Tzar-kai, PCCW.
HKT reported overall group revenue of HK$28.8 billion in 2014, a 26% improvement on the year before, according to the company’s latest financial statements. Telecommunication services contribute nearly 70% of the group’s total revenue.
Bank of America-Merrill Lynch, HSBC and Mizuho Securities were the joint global coordinators and bookrunners of the transaction. Other bookrunners include ANZ, Deutsche Bank, Morgan Stanley and Standard Chartered.