Huawei dials up new issue premium for investors

Huawei says it wants to "build a better connected world". The pricing of its latest dollar bonds should help re-build confidence among Asian G3 investors.

China’s telecoms equipment and smartphone maker Huawei Investment Holdings returned to the international bond markets with a $2 billion deal on Thursday, almost one year after it completed its debut dollar-denominated sale.

The Shenzhen-based company says it “wants to create a better connected world” and the generous pricing on its new deal seems likely to re-build investor confidence in the Asian G3 bond markets following a string of poorly received deals from Sunshine Life and e-commerce giant JD.com.

Both of the latter two deals have traded badly in the secondary market. Indeed, from an investors’ perspective JD.com ranks as one of the most disastrous offerings of the past few years, with the 10-year tranche closing almost 50bp wide of the re-offer on Thursday.

On top of this, syndicate bankers were also conscious of US Treasury moves, with 10-year Treasuries trading at 1.86% during New York hours on Thursday compared to 1.94% earlier this week.

In addition Huawei had handicapped itself by bringing a very large transaction in Reg S format and being unrated, which cut out a large number of potential investors.

As a result, the order book stood at $5.5 billion as final guidance was revised and closed at the $5 billion level, a coverage ratio of 1.5 times. This was roughly two thirds the final level the company achieved in May last year when a smaller $1 billion deal attracted an order book of $8.5 billion.

However, it beat the $4.66 billion that state-owned oil giant Sinopec achieved at the beginning of the week when investors were distracted by JD.com’s plummeting spreads.

But Huawei compensated for all these negatives with a deal that offered a proper new issue premium relative to the secondary market levels of its existing debt, themselves wide of recent tights.

This pricing strategy was in keeping with the group’s ambition of developing a long-term relationship with investors.

One syndicate banker said, “The company paid a few points for its new issue concession, but this was pretty impressive given its relatively large size.”

They added, “The company could have tightened the deal to 215bp to 220bp, but they decided not to do so because they want to ensure the bonds trade well in the secondary market.”

The group initially marketed the Reg S10-year deal at 240bp over Treasuries, before tightening guidance to 230bp over.

Final pricing for the deal, in the name of Proven Honour Capital, was fixed at 99.716% on a coupon of 4.125% to yield 4.16%, or 230bp over Treasuries, according to a term sheet seen by FinanceAsiA

A total of 233 accounts participated of which 90% were from Asia and 10% from Europe. By investor type fund managers took 38%, banks 26%, private banks 11%, soverereign wealth funds and insurers 20% and corporates 5%. 

Fair value

The group’s existing 4.125% May 2025 deal was trading on a G-spread of 210bp earlier in the day.

Mizuho calculated fair value for the new deal around the 215bp to 220bp level based on a 5bp curve extension from the 2025 bond. On this basis, the deal has offered a 10bp to 15bp new issue premium, which is fairly unheard of where investment-grade rated Chinese credits are concerned.

Citi analysts also benchmarked the deal against A2/A rated Tencent, which has a 3.8% February 2025 deal outstanding. This was trading on a G-spread of 150bp on Thursday.

“Fundamentally speaking, we think Huawei should be 30bp to 35bp wider than Tencent,” they wrote.

The analysts assigned a 15bp to 20bp premium for Huawei’s unlisted and unrated status. They also added they would expect an extra 10bp premium if the deal ended up being $2 billion, putting fair value around the 200bp to 205bp level on a G-spread basis after accounting for the one-year maturity extension.

Citi also concluded that Huawei’s 2025 bonds were trading cheap at about 50bp wide of Tencent.

Over the past couple of weeks, Tencent’s 2025 bonds have been fairly range-bound, but Huawei’s 2025 paper has spiked roughly 26bp from a low of 3.68% on April 12.

Underpinning Citi’s credit view is a belief that Huawei “exhibits a mid to low single A credit profile.”

Syndicate bankers reiterated that the company’s solid credit profile and scarcity of technology bonds underpinned pricing.

One fund manager also told FinanceAsia that Asian equity investors are also increasing their holdings in interest-paying instruments in the face of range-bound equity markets.

Strong credit metrics

A household name in China, Huawei also now ranks the world's third largest smartphone manufacturer by shipments behind Samsung and Apple.

Revenues rose 37% year-on-year to Rmb395 billion ($60.8 billion) in 2015, while net profits jumped 32% to Rmb37 billion.

Revenues from overseas markets generate 62.6% of the total, making Huawei one of China’s most successful international operators. The company’s net roadshow revealed a breakdown of 42.4% China, 37.4% EMEA, 12.8% Asia Pacific, 9.9% Americas and 2.5% other.

The net roadshow also revealed very strong financial metrics, with debt to Ebitda remaining constant at 0.6 times, while the interest coverage ratio has improved from 21.2 times at the end of 2014 to 24.2 times in 2015.

The company has also seen an increase in free cash flow to total debt, which has risen from 132.3% to 148.3% at the end of 2015.

The company has four business lines including a carrier business (network construction services), which accounts for 58.8% of revenues, consumer (smartphones and soon PC’s), which accounts for 32.7%, enterprise (big data) on 7% and other 1.5%.

Former People's Liberation Army engineer Ren Zhengfei founded the company in 1987.

Joint bookrunners for the new Huawei transaction were: ANZBank of China  (Hong Kong),  DBS,  HSBC and Standard Chartered.

This article has been updated since first publication with final deal stats.

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