Hong Kong companies establish MTN programmes

Cheung Kong Infrastructure (CKI) and Swire Pacific add to a growing number of companies in the Territory seeking diversity and ease of debt funding.

CKI is said to be furthest advanced in the establishment of a debut Euro-MTN programme, with signing expected to take place next month. A dealer group is currently in the process of being formed for what is expected to be a $1 billion-$2 billion facility arranged by the group's affiliated securities arm, CEF Capital.

Hong Kong's largest diversified infrastructure company, CKI, is run by tycoon Li Ka-shing's son Victor Li and has been an infrequent visitor to the capital markets. Rated at Hong Kong's sovereign A3/A- ceiling, it has traditionally maintained a conservative financial profile, with debt-to-total capitalization historically standing below 20% and cash flow interest coverage at around 10 times. In particular, the predictable income stream from subsidiary Hong Kong Electric has allowed the company to enjoy a high degree of financial flexibility.

Market observers believe that this is set to change, with the company planning to increase gearing as it expands its power portfolio in Australia. Having previously been heavily focused on China, where the company has investments of over $1.2 billion, it has recently diversified into more developed markets. In October, for example, it signed an agreement with Daewoo Corp and France's Groupe GTM in a $1.7 billion project to build two bridges and a tunnel connecting Pusan and Koeji Island.

Parent company Cheung Kong Holdings also has a Euro-MTN programme outstanding. A $750 million facility arranged by CEF Capital was established in autumn 1999. Since then, the company is believed to have raised nearly $900 million from just under a dozen, mainly privately placed deals. Its one major public dollar-denominated issue - a $500 million issue via Goldman Sachs - matured this month.

As one banker puts it: "The beauty of an MTN programme is that it affords such flexibility and privacy. There are no delays from getting new documentation together. If a company spots a market window it can go for it."

Similarly, Sun Hung Kai Properties, which established a $1.5 billion facility in early1999 via Morgan Stanley Dean Witter, is believed to have raised about $600 million to date from just over a dozen issues. Other Hong Kong borrowers with facilities number: Dao Heng Bank via HSBC; Kowloon Canton Railway Corporation (KCRC) via HSBC and Morgan Stanley; Mass Transit Railway Corporation (MTRC) via JP Morgan; and HSBC in a self-led programme.

HSBC and Morgan Stanley, the two banks most closely associated with MTN programmes in the Territory, have also been mandated as joint-arrangers on a $2 billion-$3 billion facility for Swire Pacific. The programme is said by market observers to have been in process for some time and is likely to be signed in March after the release of the company's full financial figures for the year 2000.

Had the diversified conglomerate not been embroiled in a land-use fee dispute with the Hong Kong government, the programme is said likely to have been established earlier. "It's not so much been a credit issue as a disclosure issue," says one outside observer. "This is not the kind of thing you'd want in the documentation of an MTN programme."

The dispute, settled earlier this month by a local arbitrator, has resulted in the company having to pay a one-time charge of HK$151 million ($19.4 million) on a residential development and potentially up to HK$4.5 billion on its Citiplaza office development. Ongoing since 1992, the case centred around 19th century leases pre-dating the imposition of a government land premium.

Analysts say that the one-off charge will make little difference to the company's balance sheet and Standard & Poor's recently re-affirmed Swire's A- rating with a stable outlook. In a statement the rating agency said, however, that the company is expected "to see a weakening in its interest coverage ratio, a lower funds flow-to-net debt ratio and a moderate increase in net debt to net capital."

The agency predicted that Swire's pretax interest coverage ratio will fall from 2.9 times in 1999 to about 2.5 times, "a weak level for this rating category". It also said that funds from operations-to-net debt should remain in the mid 20% range.

Analysts also add that the company has passed the peak of its current capex cycle and should benefit from a positive revaluation of its property portfolio from 2001 onwards.  In addition to its property interests, the company owns Hong Kong's biggest airline Cathay Pacific, bottles Coca-Cola and has interests in trading, marine services and insurance.

Its most recent foray into the capital markets came last November with a HK$1 billion three-year FRN for a US subsidiary via HSBC. It also has one other 2002 Hong Kong dollar-denominated issue outstanding and in the US dollar markets, a benchmark 2004 bond and a $300 million retail-driven perpetual subordinated issue that rarely trades and was launched in May 1997 with a quarterly coupon of 8.84%.

The company's benchmark $300 million 8.5% September 2004 issue tends to trade in line with Hong Kong's quasi sovereign borrowers, MTRC and KCRC. Yesterday (Monday), it was quoted at 107/108 on a bid/offer spread of 135bp/120bp.

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