With Goldman Sachs, HSBC and JPMorgan as joint lead managers, there will be two roadshow teams led by CEO Nicholas Sallnow-Smith in Hong Kong and Finance director Boon Wee Kuah in Singapore. One team is then said likely to move to London on Monday and other to the US. Both will then meet up in New York on Tuesday, with pricing scheduled to take place either Wednesday or Thursday.
Investors say that throughout pre-marketing, the group has shown itself to be more sensitive to price than size. With little need for funds, it is consequently more likely to opt for an aggressive benchmark relative to its nearest comparable Hutchison Whampoa, rather than increase the issue amount up to $500 million. The latter's recent 2011 issue closed Asian trading Thursday at a bid/offer spread of 202bp/192bp, having broken through the 200bp barrier for the first time earlier in the day.
Initially, investors had been sounded out at a 10bp to 15bp premium to Hutch, but the rarity value of the Jardine name, combined with the small size of the issue and the favourable tone of the markets, may yet drive pricing tighter. Whether Hong Kong Land will able to come through Hutch, however, divides observers, as the former has a one notch lower rating from Standard & Poor's (A3/A-) and many argue that the latter deserves a liquidity premium.
Preliminary feedback, however, suggests that Hong Kong demand is already building extremely strongly. The issuance vehicle will not be the Bermuda-based holding company, but a Cayman Islands subsidiary guaranteed by the Hong Kong-based company, Hong Kong Land Ltd.
As of December 2000, the guarantor had outstanding liabilities of $1.241 billion, of which: 26% comprised debt below one year; 35% one to two year debt and; 39% two to five year debt. One of the main purposes of the transaction, therefore, will be to term out the company's liability profile and provide a better match for its property leases, which are also currently being lengthened in a declining interest rate environment.
Most of its office leases are three to six years in duration and because of the downturn in the Hong Kong property market in 1997, the company is currently at the bottom of its EBITDA cycle. Consequently, where EBITDA to gross interest coverage ratios stood at 3.8 times in 1998, they had fallen to 2.6 times in 2000. This coming year, the ratio is expected to remain flat, rising back to 3 times in 2002 and 3.5 times the following year.
Total debt to EBITDA also peaked in 2000 at 5.4 times, up from 4.5 times the year previous. Debt to capitalization, on the other hand, was reduced to 19.8% in 2000 from 25.9% the previous year.
One of Hong Kong Land's secondary considerations is a desire to replace secured debt, currently $427 million of the total. Also keen to diversify its investor base, the company has accepted that it will be unable to secure pricing near a HK$6.38 billion revolving credit facility, signed in early March. This comprised one five-year tranche, with an all-in spread of about 45bp over in Libor terms and a seven-year tranche at about 55bp over Libor. With seven-year swaps at 80bp, this equates to a Treasury spread of roughly 135bp.
"The company doesn't need to do a bond," one observer reports. "It's more about stretching out its balance sheet, giving itself flexibility and widening the investor base. This type of property company is also a very strong draw for fixed income investors, because its commercial portfolio is far more resilient to a downturn than a residential one.
"It's all about location, location, location," he continues. "Hong Kong Land has the prime portfolio in land starved Hong Kong and has recorded occupancy rates above 94% for the past five years."
As of December 2000, the company operated seven Grade A office and retail complexes, with a total lettable area of approximately 4.156 million square feet for office space and 523,000 square feet for retail space. Six of these properties were based in Central, the Territorys commercial, government and financial hut and numbered Alexandra House, Exchange Square, Jardine House, the Landmark and Princes Building. Swire House, meanwhile, has been demolished for re-development by mid 2002.
In total, this portfolio represents roughly 19% of Central's total available space, with 48% of the companys lettable office area leased to financial institutions.
Observers believe that after Hong Kong Land prices, the second of the three to launch will be Citic Pacific. Having been expected to begin roadshows this week as well, investors comment that presentations have been delayed because of a small deterioration in Treasury yields.
"This is a company which seems to be far more focused on its absolute borrowing rate than dollar spreads," says one. "Despite today's rally, 10 year treasury yields are still about 25bp wider than they were 10 days ago."
Closing Asian trading on Thursday at 5.17%, 10 year yields have recently dipped down to the 4.7% level and the company is said likely to be waiting to see whether they breach the 5% mark again.
HSBC and Merrill Lynch have been mandated for a $500 million 10 year offering that is likely to use Baa3/BBB-rated Wharf Holdings as its main pricing benchmark.
But for many observers, the big question mark concerns the borrowing plans of the People's Republic of China. Having shown strong signs that it was finally gearing up for launch on Monday April 23, the sovereign pulled back late last week and failed to apply for the State Council approval needed to allow the deal to go ahead.
Mandated to Goldman Sachs, JPMorgan and Morgan Stanley, the transaction is slated to comprise a $1 billion 10 year bond. Most observers conclude that while China spreads have been very stable over the past month, the sovereign should wait until international tensions caused by the spy plane incident have finally receded.