The much-talked about loan from Hutchison Whampoa has finally been launched into general syndication after weeks of waiting.
That the deal comes to market one week after the withdrawal of Hutchison's Eu1.5 billion bond sale should be no surprise. That the loan has not been increased in the wake of the bond's demise has caused some surprise, however. It has led a number of analysts to speculate that Hutch will re-engage the bond markets once conditions settle.
The five-year bullet loan aims to raise Eu760 million with proceeds funding Hutch's Eu1.3 billion acquisition of Kruidvat, although given the company's huge cash pile ($5.9 billion excluding marketable securities at the end of the first half), it could afford to stay out of the markets altogether.
Market participants say lead arranger ABN AMRO initially sounded banks out on all-in pricing of 43bp to 47.5bp over Libor, a level considered extremely aggressive.
In fact, the initial deal was so secretive, many participants were not really sure whether Hutch was tapping the loan market at all. Moreover, the company's silence did not help matters. When contacted yesterday, one banker who remained unaware a press release had been sent out, remarked, "Is it for real?"
Other analysts have also been surprised by the small number of banks in the lead arranger group ( ABN AMRO, Bayerische Landesbank, Cooperatieve Centrale Raiffeisen-Boerenleenbank and ING Bank). But as one explains, "It's not particularly strange that there are so few lead arrangers since a lot of banks have very full credit lines to the group."
Others, however, believe banks were put off by the tight pricing levels. Moreover, Hong Kong and PRC banks, which were expected to participate in the deal, would have had to book assets in Europe. Non participants also point out that coming in at the lower levels for purely relationship reasons was not that appealing.
Launch of the deal was further delayed because the company was awaiting approval from the competition authorities of the European Union and did not receive the final go-ahead until September 27.
The new deal has a revised structure. Apart from more generous pricing, the loan has also been split into two tax efficient tranches - Tranche A is for Eu550 million (Netherlands SPV) and Tranche B for $210 million (UK SPV).
Each tranche pays a spread of 40bp over Euribor and Libor respectively. Arrangers joining the transaction with commitments equivalent to Eu50 million or above, will receive 65bp management fees (all-in of 53bp). Co-arrangers with commitments of Eu25-Eu49 million, will receive management fees of 57.5bp (all-in of 51.5bp). Lead managers committing Eu10-Eu24 million will receive management fees of 50bp (all-in of 50bp).
Hutch could have borrowed much more cheaply in the Hong Kong dollar market, where banks are flush with liquidity. Its decision to tap Euro financing has been driven by three reasons.
Firstly, it is keen to widen its lender base and diversify its funding stream. Secondly, the total cost of borrowing in Hong Kong dollars and swapping into Euros would have been more expensive than the present financing. Thirdly and more importantly, Hutch has always matched borrowings in the currency in which it has acquired assets or incurred costs.
Market participants remain split between those that feel pricing is now fair and those who believe it is still too tight. Recent deals for China Resources Enterprise and Citic Pacific paid margins of 39bp and 45bp over Hibor respectively.
Bankers also argue that Hutch has been able to save a lot more than what it would have had to pay on an equivalent bond issue. The Hutchison 2007 bonds, for example, currently trade around 190bp over 5-year US treasuries. This equates to a yield of 4.54% compared to roughly 2.10% on the new loan.
The loan is also much more cost efficient than a nine-year Eu2.2 billion deal tapped by H3G Italia and guaranteed by Hutch. According to figures provided by Dealogic, that deal paid a margin of 100bp over Euribor. Pricing on the current deal is closer to a HK$12 billion dual-tranche deal tapped in July last year. With a five-year maturity, this paid a spread of 38.5bp over Hibor.
The financial covenants on the present deal are also similar to those on the HK$12 billion loan. They will:
- at all times procure that its consolidated borrowed money does not exceed twice its adjusted consolidated net worth
- secured consolidated borrowed money does not exceed adjusted consolidated net worth
- adjusted consolidated net worth is not less than HK$25 billion
The borrowers for the present financing are two wholly-owned subsidiaries in the Netherlands and the UK. Syndication is slated for close on October 29.