hutchison-gets-solid-response-for-first-bond-tender

Hutchison gets solid response for first bond tender

Investors tender $1.77 billion of bonds by the early deadline, versus the company's offer to buy back $1.5 billion. The majority of the bonds tendered are in the shortest maturities.

Hutchison Whampoa announced on Friday that the tender offer it launched on May 7 was oversubscribed by the early tender deadline of last Thursday, meaning it will definitely buy back the full $1.5 billion worth of bonds.

How much it will buy from each issue won't be finalised until after the deal closes, however. As of now, the majority of the bonds tendered are in the shortest maturities, while the company has said it will prioritise buying back the two longest bonds. If more of the longest maturities are tendered before the final deadline on June 8, the pro rata acceptance rate of the lowest prioritised 2013 bonds will be reduced accordingly.

The chance of seeing many more bonds tendered over the next couple of weeks is pretty slim, however, as investors can no longer receive the early tender premium of 3 cents per dollar of principal. Most bondholders who wished to accept the offer would therefore already have done so. The tender is being arranged by Morgan Stanley.

In a brief statement, the Hong Kong-listed conglomerate said bonds with a combined principal amount of $1.77 billion had been tendered by the early deadline. The 6.25% bonds maturing in 2014 attracted the most interest with a principal amount of $641.4 million tendered, followed by $602.7 million worth of the 6.5% bonds due 2013.

The 7.5% bonds due 2027, which was the company's first priority with regard to this buy-back tender, attracted $171.1 million worth of acceptances, while $354.2 million of the 7.45% bonds due 2033 was tendered.

However, since the two longest maturities were also the smallest in terms of outstanding amount, 34.2% of the 2027s were tendered, compared with 23.6% of the 2033s; 32.1% of the 2014s; and 17.2% of the 2013s. According to the original announcement in early May, there was $500 million of 2027s outstanding, $1.5 billion of 2033s, $2 billion of 2014s and $3.5 billion of 2013s.

One observer noted that while some analysts have argued that the tender price on the shortest bonds was the most attractive, buy-and-hold investors also actually like Hutchison's longer-dated debt, which has a strong credit rating of  A-/A3, and since there aren't very many bonds to replace them with, many investors chose to hang on to this paper.

Including the early tender premium of 3 cents, investors who tendered the 2027 bonds will receive a spread of 318bp over the 4.5% Treasury note due in May 2038; while the 2033 bonds will pay a spread of 333bp over the same 2038 Treasury note. For the shorter maturities, the spread has been fixed over the 1.875% Treasury note maturing in April 2014, with the 2014s paying 257bp over and the 2013s paying 251bp over.

At the time of the launch, Brayan Lai, a credit analyst with French investment bank Calyon, estimated that the tender spread translated into a price of 100.57% of face value for the 2027s; 98.4% for the 2033s; 106.6% for the 2014s and 106.5% for the 2013s. US Treasury yields have been moving up since then, which means that the actual price received will be slightly lower than that. However, most long-term investors who buy these bonds will hedge the US Treasury risk and hold the bonds on a spread basis, which means the movement in Treasury prices and yields would have had no significant impact on how attractive the offer was at any given time.

This is the first of two bond tenders launched by Hutchison within one week of each other. Separate from this offer, the company is also offering to buy back up to a combined $1.5 billion of principal amount in two short-dated bonds - the 5.45% bonds due 2010, which has $1.37 billion still outstanding; and the 7% bonds due 2011s with $1.46 billion outstanding. The company has said that it is willing to buy back up to $750 million from each of the two issues.

The second tender, which is also arranged by Morgan Stanley, is being conducted through a modified Dutch auction whereby investors can tender their bonds at a price of their own choosing (within a pre-set range). Hutchison will accept the lowest price at which it will be able to buy back the desired amount of bonds.

The company is offering to pay between $103.5 and $104.125 per $100 of outstanding principal of the 2010s, including a $2 early tender premium for investors who submit their bonds before 5pm New York time on June 2. The offer for the 2011s ranges from $106.125 to $106.875 per $100 of principal and again includes a $2 early tender premium. The second offer will stay open until June 16.

Even though it is for the most part buying back these bonds slightly above par, analysts say it makes sense for Hutchison to use some of its lofty cash reserves to reduce its future interest costs. However, in early April, the company also issued $1.5 billion of new 10-year bonds with a coupon of 7.625% and a spread of 475bp over the relevant US Treasury note, which suggests that aside from cost savings, Hutchison is also aiming to shorten the duration of its outstanding debt somewhat. 

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