The Hong Kong Airport Authority completed a debut international bond yesterday (Wednesday), pricing its $350 million deal at a predictably tight level on the back of huge demand from its home market.
Under joint leads Goldman Sachs and HSBC, pricing of the 10-year transaction came at 99.078% on a coupon of 5% to yield 5.119% or 75bp over Treasuries. Fees were a miserly 15bp.
On a Libor basis, the A+ rated deal priced at about 28bp over. This is roughly 5bp to 10bp through the trading levels of the MTR Corp and KCRC on a like-for-like basis. Both of the transport companies have extremely illiquid bonds outstanding, both of which have been heavily asset swapped and provide little more than technical benchmarks.
MTR Corp's November 2010 bond, for example, is currently quoted around the 118% level, equating to a spread of 15bp over 10-year Treasuries or 27bp over Libor. KCRC also has a 2010 bond due in March that year, currently quoted at 120.38% to yield zero basis points over Treasuries, or 30bp on a Libor basis.
The absence of a sovereign benchmark for such a long time meant that demand for HKAA was strong and books closed at the $1.6 billion mark with participation by 110 accounts, of whom four put in orders for more than $100 million. By geography, the deal had a heavy bias towards Asia, which took 80%, of which two thirds came from Hong Kong. Europe accounted for the remaining 20%.
By investor type, banks came in for 55%, funds 28%, pension funds 4%, insurance companies 7% and private banking 6%. The strong showing by the banking community was also not very surprising given the huge demand seen earlier this year for a HK$.178 billion retail issue.
With an oversubscription rate of 13 times recorded on the earlier deal, there was clearly a lot of pent up demand from banks with open, but un-filled credit lines. But like MTR and KCRC before it, the HKAA deal is likely to be heavily asset swapped and its small size means that it too will soon become highly illiquid.
The borrower had no intention of raising the issue size to a more normal benchmark level of $500 million because the new bond fits a specific funding need and it does not have the Treasury teams of an MTR or KCRC to re-invest the cash. Although the deal was lifted from $300 million to $350 million, HKAA had always said it hoped to raise up to $350 million and went out with the smaller base size to build momentum.
Plans to originally launch the deal in the spring were shelved due to SARs. As a result of waiting, the company has achieved a lower spread to Treasuries and a lower spread to Libor than it initially envisaged - 100bp and 50bp respectively. However, rising Treasury yields since then, mean it has not been able to achieve quite the same coupon as CNOOC, which printed a 10-year deal in May with a 4.125% coupon.
After nine months in which Hong Kong has been dealt multiple blows from amongst others: SARs, a widening budget deficit, Territory-wide protests against Article 23 and a number of high profile political resignations, it was important to set a positive tone with the new deal. Having positioned itself as the new sovereign proxy, HKAA should, therefore, be happy that the Territory appears to have lost none of its cachet with investors.
Analysts say HKAA makes a far better sovereign proxy, because it does not have a large property portfolio like the MTR Corp. And as one puts it, HKAA is a, "services business dealing in logistics and human capital, with a future tied to the growth opportunities of the Pearl River Delta."
How HKAA intends to deal with the competition posed by the four other competing airlines in the Pearl River Delta, not to mention those of the Yangtze Delta serving Taiwan, will be the key determinant of future success. Tie-ups may also necessitate future capital outlays.
At the moment, the credit is seen as a mild de-leveraging play and has reduced debt from HK$8.45 billion ($1.08 billion) at the end of March 2002 to HK$7.8 billion by March 2003. Debt to capitalization has likewise dropped from 23.2% to 17.4% and EBITDA/interest coverage ratio improved to 11.4 times.
At the same time, HKAA is throwing off free cash of about HK$2.1 billion a year, although analysts say the figure is likely to decline to HK$566 million this year, because capex will increase as the airport operator extends its East Wing.