HSBC completed an Eu1 billion transaction for Hutchison Whampoa at London's close yesterday (Wednesday), pricing the deal 7bp back of the group's outstanding 10-year dollar deal.
The new issue came at 99.579% on a coupon of 5.875% to yield 5.932%. This represented a yield of 208bp over Bunds, 197bp over mid-swaps, or 225bp on an equivalent Treasuries basis. At the time of pricing, the A3/A- rated group's February 2013 bond was being quoted at 218bp over Treasuries.
For Hutch, the deal is likely to be viewed as a great achievement given the disappointment it suffered last October when its previous attempt to issue a benchmark euro deal collapsed. At the time, many thought its strategy misguided and overly ambitious. A minority blamed failure on an unexpected secondary market rout, which cleared the primary markets of virtually all deals for over a week.
This time round, observers have been equally divided in their opinion of the deal.
Hutchison, by contrast, is said to have been very clear about what it wanted, specifying an issue size of Eu1 billion, a 10-year maturity and pricing flat to its dollar paper. A number of houses had the chance to bid for the deal, but most baulked at hard underwriting more than Eu500 million, let alone Eu1 billion.
Those that would go up to Eu750 million, believed investors would only the buy the deal if it came up to 20bp wide of the dollar deal. Such caution, was probably in part driven by the knowledge that three lead managers - Deutsche, HSBC and JPMorgan - had been unable to get a deal away in October.
It was also driven by a belief that new borrowers need to approach the euro-denominated market in incremental stages, with few attempting to debut with an issue size beyond Eu750 million. Hutch has successfully tapped the market once before back in 1999 when it raised Eu500 million from a seven-year deal via Deutsche Bank and HSBC. This deal is now considered to be almost completely illiquid.
But in what has been described as the kind of ballsy move for which HSBC has never previously been renowned, the bank was prepared to step up to the plate on its own. Some market participants argue that it subsequently found little credit appetite in Europe and only limited orders from private banking channels in Asia.
This meant that a large block of paper was left sitting on its books. "HSBC was always quite happy to take a large position because some of its outstanding loans to Hutch have recently rolled off and credit lines have freed up," says one banker.
Some houses told a similar tale back in May when HSBC re-opened the February 2103 bond with a $1 billion tap. However, the doubters were soon proved wrong by the deal's secondary market trading pattern and HSBC says they will be in for a similar shock when the new deals starts trading.
The lead reports a total of 107 investors in an order book, which closed at Eu1.2 billion. Despite the fact that most market players thought the book had been driven by Asia, the geographical breakdown shows that 73% was placed into 15 European countries and 27% into Asia.
By investor type, banks accounted for 45%, fund managers 28%, retail 13%, insurance funds 12% and pension funds 2%. Alone four private banking groups in Asia are said to have placed orders for more than Eu50 million each.
As to whether it had purchased the transaction outright, HSBC is only prepared to say that there was some form of underwriting and fees totaled 37.5bp.
The success of the new deal is attributed to a fundamentally different tone to the market compared to October 2002, when Hutchison's credit profile was on a downward spiral and the underlying markets suddenly turned volatile. As one banker puts it, "The 10-year sector has been holding up pretty well recently and investors are generally much more positive about corporate credit. They're starting to move along the curve looking for duration and yield."
In this respect, Hutch offers a significant yield pick-up over European comparables such as Deutsche Telekom and France Telecom, which are said to be trading around 120bp over mid-swaps. Other single-A rated European corporates are said to be at 100bp over, compared to Hutch's 197bp level.
For Hutch, the new deal has satisfied many of its strategic objectives. It has, for example, long hoped to develop stronger credit awareness in a region where an increasingly greater proportion of its revenues are derived. It may also bring to a close its fund raising activities for 2003, although Treasury officials are said to have told investors that they will still take an opportunistic view of the market if a window presents itself.