Hutch strikes with opportunistic $1.5 billion bond

Li Ka-shing’s Hutchison Whampoa joined the wave of borrowers that have tapped the market so far this year, with a $1.5 billion dual-tranche five- and 10-year bond that priced early Wednesday morning. The company mandated Goldman Sachs, HSBC and J.P. Morgan late last week and pulled the trigger shortly after without conducting a roadshow.

The leads went out with guidance of Treasuries plus 275bp for both tranches on Tuesday. The $1 billion 10-year bonds priced at Treasuries plus 275bp and the $500 million five-year bonds also priced at the same spread. “Hutch has a very flat curve so we decided to go out with the same spread for both tranches,” said one person familiar with the deal.

As the books were being built in Asia, there was muted demand from regional investors for the five-year bonds so the leads decided to cap the size at $500 million to ensure that the bonds performed in secondary trading.

“There wasn’t much interest from Asian investors,” said one person familiar with the deal. “But then we had a positive surprise from US investors, who showed a lot of interest.”

The total book size was $2.8 billion — $1.2 billion for the five-year and $1.6 billion for the 10-year bond. In the end, the five-year bonds performed in secondary markets, tightening to Treasuries plus 273bp/ 271bp, whereas the 10-year bonds widened to Treasuries plus 283bp/280bp on Wednesday morning.

According to one Hong Kong-based investor who did not participate in the deal, Hutch’s outstanding bonds were trading around Treasuries plus 250bp before it announced the deal but subsequently widened, taking away the attractiveness of the deal.

“The Hutch secondary bonds widened 20bp after the deal was announced so the new-issue premium evaporated,” said the investor. “There’s indigestion setting in. We expect to see a lot more investment-grade names come to market,” he added.

Rivals were quick to criticise the underperformance of the 10-year bonds. One rival banker said that the deal “really struggled” while another rival said that the 10-year bonds underperformed as the leads had priced a $1 billion deal with just $1.6 billion of demand.

However, a second person familiar with deal pointed out that Hutch got a tightly priced deal with participation from high-quality accounts. “People are quick to take pot shots at deals. It’s not the book size that matters. It’s how it trades in secondary,” he said. “As I see it, one tranche has tightened while the other has widened by only 5bp, which isn’t a bad outcome given that Hutch did not pay much of a new-issue premium. If we had really misallocated the bonds, it would be trading a lot wider.”

In fact, the deal drew high participation from asset managers. For the five-year tranche, asset managers were allocated 83%, insurers and pension funds 4%, banks and central banks 5% and private banks 8%. US investors were allocated 73%, Asian investors 9% and European investors 18%.

For the 10-year tranche, asset managers were allocated 66%, insurers and pension funds 16%, banks and central banks 11%, and private banks 7%. US investors were allocated 47%, Asia 36%, and Europe 17%.

The coupon for the 10-year bonds was fixed at 4.625% and the notes were reoffered at 99.25. The coupon for the five-year bonds was fixed at 3.5% and the notes were reoffered at 99.519.

Hong Kong-based conglomerate Hutchison Whampoa is rated A3 by Moody’s and A- by Standard & Poor’s and Fitch. According to S&P, Hutchison will be using the proceeds to refinance existing borrowings.