Hutch perpetual draws fanfare from investors

Demand for corporate hybrids continues to be robust, with Hutch drawing a $4.25 billion orderbook for its latest offering.

CK Hutchison Holdings returned to the international bond markets for the second time in two months on Tuesday, raising $1 billion from a perpetual non-call five-year bond that priced during New York hours.

The issuer — rated A3/A-/A- by Moody’s/S&P/Fitch — went out with initial price talk at "the 4.375% area" on Tuesday morning, before narrowing the 144A/Reg S deal to between 4% and 4.25%. The bond ended up pricing at par at the tight-end of the yield range, according to a term sheet seen by FinanceAsia.

Bankers used CLP’s outstanding 4.25% $750 million perpetual bond as a major valuation benchmark. The bond, which is callable in September 2019 and rated one notch higher than Hutchison by S&P, was trading at 102.38 to yield 3.24% on Tuesday morning, equivalent to a G-spread of 180bp.

Extending the maturity curve by two-and-a-half years, a theoretical CLP perpetual non-call five-year bond should be yielding roughly 3.97%, bankers said. This is derived from adding a 30bp curve extension, the G-spread of 180bp and the current five-year US treasury yield of 1.87%.

CLP, a Hong Kong-listed power utility company with exposure to India to Australia, is rated A2/A- by Moody's/S&P.

Bankers also pointed to AusNet’s 5.75% $375 million hybrid as a second benchmark. The bond, which is callable in September 2021, was yielding 3.67% on Tuesday morning, or a G-spread of 188bp.

AusNet is an Australian utility company whose perpetual bond is rated Baa2/BBB by Moody’s and S&P, the same level as Hutch. Bankers said a new AusNet perpetual non-call five-year bond would come at around 3.78%, based on a 12bp curve extension.

“The premium for Hutch’s new hybrid was paid because of its more diversified business model and its more acquisitive nature,” the banker said.

The ports-to-telecoms conglomerate, controlled by Hong Kong billionaire Li Ka-shing, built up a $4.5 billion order book at the release of final price guidance, according to a senior banker running the deal. But he added that the size of order book surpassed that level earlier in the book-building process, as demand for blue-chip credits continues in Asia.

In the secondary market, the bond traded up on Wednesday morning, hitting a cash price of 100.4/100.48 to yield 3.91%/3.89%, according to market data.

The best intentions

The new bond, which is first callable in May 2022, will pay a fixed coupon for the first five years. But if the company decides not to redeem it in year five, the coupon rate will be reset to then prevailing five-year US Treasury yield plus an initial step-up of 2.07%. The bond will reset every five years thereafter, and comes with a 25bp stepup in year 10 and another 75bp pickup after 25 years.

The new deal carries “intention”-based capital replacement language — in essence, saying the issuer intends to replacement the bond with another form of capital by the second coupon step-up date without explicitly forcing it to do so.

This contrasts with the language used in the documentation of Hutch's May 2012 perpetual deal, which the latest bond is replacing. Under the terms of its previous perpetual offering Hutchison had to include a replacement capital covenant, a legally binding contract.

The perpetual bond ranks only higher than the group’s common equity and is treated as 50% as equity in the first five years, according to Fitch. The bond will receive zero equity treatment thereafter.

The group sold a dual-tranche deal in late March, collectively raising $1.8 billion from a five-year and a 10-year senior note.

Some 230 investors placed orders worth $4.25 billion for the deal. Asian investors took 67% of the entire deal, leaving 25% to Europe and the remaining 8% to US accounts. By investor type, fund managers bought 47%, public sector investors 22%, private banks 19% and insurers 10%. The remaining 2% went into banks.

The group plans to use the proceeds to refinance certain indebtedness and for general corporate purposes, including its $1 billion 6% perpetual bond, which becomes callable this month.

The bookrunners of the new deal were BofA Merrill Lynch, Credit Agricole CIB, Goldman Sachs and HSBC.

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