Hutch sets new record for Asian bond market

Conglomerate prices largest bond offering in Asian history.

Hutchison Whampoa topped off a year of many firsts last night (Wednesday) with the completion of a $5 billion three tranche bond issue via Citigroup, Goldman Sachs, HSBC and Merrill Lynch. All three tranches were priced at the tight end of revised indicative terms after accumulating a global order book of just over $13 billion and 698 separate accounts (with a large degree of overlap).

A $1.5 billion seven-year tranche was priced at 99.741% on a coupon of 5.45% to yield 185bp over Treasuries. This compares to original guidance around the 195bp area.

A $2 billion 10-year bond with a long first coupon and 2014 maturity was priced at 99.01% on a coupon of 6.25% to yield 205bp over Treasuries. This tranche was initially marketed at 205bp to 210bp over.

Finally, a $1.5 billion 30-year was priced at 99.774% on a coupon of 7.45% to yield 240bp over Treasuries. Initial price talk was in the 245bp area.

Unlike many Asian borrowers, Hutch paid market standard fees based on its A3/A- credit standing, with the seven-year paying 40bp, the 10-year 45bp and the 30-year 87.5bp. For the company's three house banks - Goldman, HSBC and Merrill Lynch, the deal brings an active, but not uniformly profitable year, to an end.

For Citigroup, the deal must be extremely satisfying for rainmaker Francis Leung. Despite his stranglehold over KS Li business, Leung has never quite been able to extend it to the group's most active borrower.

After a two-day bookbuild, books for the seven-year tranche totaled $6 billion. By geography, 52% was placed into the US and 24% each to Asia and Europe. By investor type, 59% went to funds, 16% to banks, 14% to insurance funds and 11% to private banks, pension funds and corporates. There were 88 orders from Asia, 91 from Europe and 120 from the US

The two longer tranches were even more heavily dominated by US accounts, with the 10-year recording a 67% allocation to the US, 13% to Asia and 20% to Europe. Its order book closed at $4.2 billion, with 57 orders from Asia, 68 from Europe and 110 from the US. By investor type, funds took 56%, insurance companies 23%, banks 15% and the rest 6%.

In the 30-year, 70% went to the US, 13% to Asia and 17% to Europe. Its order book totaled $2 billion, with 37 orders from Asia, 53 from Europe and 74 from the US. By investor type, funds took 60%, insurance companies 22%, banks 8%, pension funds 7% and the rest 3%.

Heavy US demand was also a feature of the Hutch's last re-opening in May. In both instances, US yield buyers in particular have been drawn to the credit because of attractive relative value comparisons to single-A US industrial credits, which trade up to 100bp tighter.

On pure ratings basis, Hutch holds a lot of value relative to comparable Asian credits and the whole of the Greater China universe, with the exception of PCCW-HKT, which also remains an outlyer. However, the credit has been progressively hit by looming downgrades, 3G concerns and in the past few days, new supply.

Sensibly the leads went out with wide price guidance in the hope of generating momentum and in the knowledge that secondary spreads would blow out in the interim period. In the end, secondary spreads and the primary book met in the middle, so that the new deal did not end up looking quite so cheap as it did initially.

The company's February 2013 bond was trading about 188bp over Treasuries at New York's open Wednesday and its February 2011 bond at about 127bp over. On a Libor basis, the seven-year priced flat to the 2011 bond, which is three months longer, while the long 10-year offered a 17bp pick-up for a one-year maturity extension.

Bankers credit Hutch with astute market timing. With every deal this year, the company has waited for a market window and used an accelerated timetable to mitigate execution risk.

As one banker puts it, "The whole investment grade market has developed a more positive footing because of the positive reception to Ford's downgrade. Allied to this, supply from Asia has tapered off, so there was room for a deal of this kind. Investors knew this was Hutch's silver bullet trade and they had to be there."

As a result of the deal, Hutch has surpassed the record set by Petronas in May 2002 for the largest corporate bond financing in Asian history ($2.73 billion) and the overall record set by the Republic of Korea in April 1998 with its $4 billion two-tranche offering.

The 30-year also now stands as the largest long bond in Asian history. Indeed every single Hutch deal this year has set a new record of some kind or other. Its most recent Eu1 billion deal of early July, for example, is the largest ever euro-denominated deal from Asia; its $3.5 billion February 2013 deal the largest bond issue in Asian history and its two $1 billion re-openings of April and May the largest of their kind from the region as well.

All five deals have been driven by the group's desire to mitigate re-financing risk and to do so before interest rates start climbing. At the beginning of this year, 66% of the company's then $23.2 billion gross debt position would fall due within three years - $3 billion in 2003, $3.9 billion in 2004 and $3.7 billion in 2005.

Of this $10.6 billion total, the company has now dealt with $9.5 billion.

Having significantly termed out its debt profile, Hutch has also raised enough funds to re-finance more expensive debt and maintain its $10.8 billion liquidity cushion without having to monetize other assets. Over the course of the two-day roadshow, company officials re-iterated a strategy that has remained consistent all year. Their reward has been a huge order book.

Group finance director Frank Sixt and group treasurer KS Chan have always said that while 3G remains fully funded, the group will continue to drawn down on available bank lines and hence increase gearing. Debt to capital is expected to peak in the mid 20's over the course of 2004 and 2005, before moving back to the high teens again.

At the time of the company's first half results in June, debt to capital stood at 20.7%, with gross debt rising 25% over the first six months to $29.05 billion. Since then, the company has re-paid a $3 billion exchangeable, which fell due in September.

It also intends to re-pay a $2.6 billion exchangeable, which falls due in January and says that it will save 40bp to 50bp per annum if also re-finances a number of expensive bank loans.

It has also committed not to return to the dollar markets for at least six months.