Hutchison sells $3 billion of dual-tranche bonds

The six- and 10-year bonds are issued to refinance existing debt and mark Hutchison's largest bond deal since 2003.

Hutchison Whampoa has sold $3 billion worth of six- and 10-year bonds as part of a continuing liability management exercise that has also included two buyback tenders this year. All the money raised will be used to refinance existing debt, although the company did not specify what type of debt it intends to retire.

The Reg S/144A bond issue, which was priced in the early hours of the Hong Kong morning on Wednesday and upsized from an initial plan to raise $2 billion, is Hutchison's second bond issue this year and the largest from the Hong Kong conglomerate since 2003.

However, it isn't the largest deal in Asia year-to-date as that record will continue to be held by Petronas. The Malaysian state-owned oil producer sold $4.5 billion worth of conventional and sukuk bonds in August through a deal that attracted some criticism for the significant size increase, which took some investors by surprise, and for being placed with too many short-term accounts. Despite a massive order book of almost $20 billion, the Petronas bonds traded down in the aftermarket.

The reception for the Hutchison deal was significantly more enthusiastic all round, which allowed the bookrunners not only to upsize the deal, but to price both tranches through the existing Hutchison curve. Both maturities also tightened in the secondary market yesterday. To avoid a similarly negative reaction as Petronas with regard to the decision to increase the size, the bookrunners made a round of late calls to a number of large Asia-based investors to inform them of the decision and give them the option to drop out. According to sources, nobody did. As a further precaution, allocations were also skewed towards US and Europe where the order book was still building when the decision to upsize was made, meaning investors were aware of the situation as they placed their orders.

Observers said the success of the deal is a clear testament to the investor demand for high-grade paper and the scarcity of such issues in Asia. Hutchison, which is rated A3 by Moody's Investors Service and the equivalent A- by Standard & Poor's and Fitch, was clearly aware of this situation and chose to use the opportunity to reduce its borrowing costs.

"There is a latent demand for quality paper from real money accounts and an issuer like Hutchison is a great match," noted one analyst. He added that the bonds have an "opportunistic tone" as Hutchison, which is controlled by Li Ka-shing, Hong Kong's richest tycoon, and known as a very sophisticated borrower, clearly saw the demand and chose to return with a new issue specifically because of the improved market conditions, including a significant spread tightening over the past few months.

Hutchison, whose businesses range from ports, telecommunications, property and retail to energy and infrastructure, also did a good job of identifying maturity gaps on its curve that suited both it as an issuer and the potential buyers. The company did issue $1.5 billion of new 10-year bonds maturing in 2019 in April this year, but that bond now trades well above par because of a relatively high coupon - a legacy of it having been issued at a time of much higher interest rates - which has resulted in strong demand from investors focusing on annual returns. That said, investors were keen for another opportunity to get 10-year exposure at below par.

Meanwhile, Hutchison was able to achieve a significantly lower coupon on this new 10-year bond - 5.75% versus 7.625% - which will reduce its debt servicing costs.

However, with current appetite being slightly in favour of shorter-dated maturities, the six-year tranche was the larger of the two. It ended up at $2 billion after being upsized from the $1.25 billion that had been indicated to investors by the close of Asian trading. The 10-year tranche was increased to $1 billion from $750 million. The increase was prompted by the fact that the total order book amounted to more than $13.3 billion - 4.4 times the final size - with $9.3 billion of demand for the six-year tranche and more than $4 billion for the 10-year.

At the time of launch, at 9am Hong Kong time Tuesday, price guidance of 240bp was whispered for both tranches, and by the end of the Hong Kong trading session, the formal guidance had tightened to 230bp plus minus 2.5bp for the six-year tranche and 235bp-240bp for the 10-year.

In the end, the six-year tranche, which matures on September 11, 2015, was priced to yield 227.5bp over the benchmark five-year US Treasury. The coupon was fixed at 4.625% and the bonds were re-offered at 99.829 for a yield to maturity of 4.658%.

The 10-year, which matures on September 11, 2019, was priced at 235bp over the 10-year US Treasury. The coupon was fixed at 5.75% and a re-offer price of 99.423 gave a yield to maturity of 5.827%.

According to a banker, the yield spread over Treasuries translated into a spread over swaps of 165bp for the six-year tranche, which at the time of pricing compared with a 174bp spread for Hutchison's 2014 bonds and 183bp for its 2013s. Similarly, the new 10-year bonds were priced at a 223bp spread over swaps, compared with a 225bp spread for the existing 2019s. This means neither of the two issued required a new issue premium - again a reflection of the scarcity of equivalent paper in Asia.

Even so, the bonds tightened in the secondary market with the six-year being quoted at a spread of 223bp-221bp in late Asian trading yesterday. By the same time the 10-year had tightened to 232bp-230bp.

"In light of what has been happening in the market over the past 18 months, this is an outstanding print," said the analyst quoted earlier.

Forty percent of the six-year tranche was allocated to the US, while 35% went to Europe and 25% to Asia. In terms of types of the investors, fund managers ended up with 63%, insurance and pension funds got 13%, private banks 11%, banks 10% and central banks 3%. A total of 480 accounts submitted orders.

The 10-year tranche was allocated 60% to the US, 30% to Europe and 10% to Asia. Fund managers received 68%, insurance and pension funds 17%, banks 8% and private banks 7%.

The deal was led by Barclays Capital, Deutsche Bank and HSBC. Deutsche and HSBC were both involved in Hutchison's April bond issue as well, while Barclays was brought in to replace J.P. Morgan which was a bookrunner on the first deal.

Except for the April issue, Hutchison last sold dollar bonds in November 2003, when it raised $5 billion through a multi-tranche deal that still ranks as the biggest-ever bond issuance by an Asian company.

¬ Haymarket Media Limited. All rights reserved.

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