Hutchison turns to euros for third international bond this year

The Hong Kong conglomerate sells Ç1.75 billion of seven-year bonds after receiving Ç7.5 billion worth of orders in a matter of hours.

Hutchison Whampoa seems intent on giving Korea's Kexim a fight for the title as this year's most active Asian borrower with the completion late Tuesday of its third international bond issue in just seven months. This time the Hong Kong conglomerate turned to the euro market, which allowed it to target a different investor base than for its two earlier dollar bonds, and the €7.5 billion ($11.2 billion) order book suggests that, from a demand perspective at least, this was the right call.

And that was echoed in the pricing, with bankers estimating that the company was able to get away with paying virtually no issue premium despite the fact that at €1.75 billion ($2.6 billion) the seven-year Reg-S deal was one of the largest bond issues by an Asian corporate ever. According to a banker, it also ranks as the largest euro-denominated bond from Asia ex-Japan.

One source noted that the US dollar bond markets have weakened in the wake of the bankruptcy filing by US commercial lender CIT and in the lead-up to and aftermath of last Friday's non-farm payroll data, which showed that the US unemployment rate is now the highest in 10 years, while European corporate bonds have continued to perform well. And as a result, the relative pricing worked in Hutchison's favour. Consequently, a euro-denominated issue was "a natural choice" at this point in time, he said.

People close to the issuer said the choice of funding currency and the timing were entirely Hutchison's ideas, and the deal continues its almost flawless track record when it comes to reading the market and picking the right time to approach it.

The desire to capture a window of opportunity was underscored by the speed at which the deal was completed. It launched in the early afternoon Hong Kong time on Tuesday and closed about six hours later with the pricing and allocation sorted out before midnight. Final terms were communicated at about 7pm Hong Kong time, or about three hours after European investors -- who accounted for more than 95% of the demand -- came into work and began to take a look at the issue. This would qualify as a fast execution by most standards, and even more so given the size and the fact that this was the first euro-denominated bond out of Asia since Export-Import Bank of Korea (Kexim) brought a €750 million deal 18 months ago.

In that time, joint bookrunners Calyon, Deutsche Bank and HSBC were said to have compiled a top-quality order book consisting of about 450 accounts, with heavy participation of real money funds, which was testament to the perceived quality of the credit and the fact that most investors are already familiar with the company, which has both retail and telecom operations in Europe. It is questionable if any other Asian issuer could have achieved this as quickly.

The price guidance for what was initially defined only as a "benchmark" size bond and then became approximately €1.5 billion, was set at 165bp to 175bp over mid-swaps. In the early evening Hong Kong time, the spread was fixed at the low end of that range (165bp) and, at around the same time, investors were told the size would likely increase to €1.75 billion.

The 2016 bonds were priced with a coupon of 4.75%, which at the re-offer price of 99.685 gave a yield to maturity of 4.804%. The spread over mid-swaps translated into about 199bp over the German bund, which is the benchmark that the bonds are trading against in the secondary market.

For comparisons, investors were looking at Hutchison's outstanding (slightly shorter) 2016 euro-denominated bonds, which were bid at about 162bp over mid-swaps at the time of pricing. Another price guiding point was the company's dollar-denominated 2015s and the 2019s issued in September, which were quoted at 166bp and 215bp over mid-swaps respectively.

But while the bonds were priced essentially flat against its interpolated curve, they tightened another 3bp-4bp in the secondary market as investors came in to top up their scaled-back allocations. Deeming from the distribution breakdown, banks may have been among the most disappointed with their allocations, having received only 12% of the deal. One source noted that this would have been a direct result of the high quality order book and the large number of real money funds that submitted sizeable orders -- rumours were of several tickets above €100 million.

Fund managers were eventually allocated 62% of the bonds, insurance and pension funds received 19%, private banks ended up with 5%, and others, including central banks, took 1%. The remaining 12%, as earlier mentioned, went to banks.

In terms of geographies, 42% of the issue was bought by German investors, 16% went to the UK, 11% to France, 7% to Italy, 7% to Switzerland, 6% to Benelux, 5% to Scandinavia, 4% to Iberia and the remaining 2% to Asia.

Like the funds raised from its two dollar bonds earlier in the year, the proceeds from this deal will go primarily towards debt refinancing. Among other things, Hutchison has a loan that comes due next year and it has also engaged in significant liability management exercises this year, including two separate bond buy-back tenders and one bond exchange.

Hutchison, whose businesses range from ports, telecommunications, property and retail to energy and infrastructure, is viewed as a strong credit and is rated A- by both Standard & Poor's and Fitch, and the equivalent A3 by Moody's Investors Service (albeit with a negative outlook). The rating, according to Fitch, is supported by the company's "diversified business mix, strong and steady cash flows from its traditional businesses (ports and investment properties), high liquidity, well-spread debt maturity profile and strong financial flexibility".

However, while confirming that the new bond issue will get the same ratings as the company itself, all three credit agencies noted the weak performance of the company's third generation mobile business, The 3 Group.

"The 3 Group continues to report an Ebit loss and negative free cash flow, and this performance -- coupled with overall weaker performances from Hutchison's established
businesses in the first half 2009 -- have resulted in fairly weak credit metrics for
the group as a whole," wrote Elizabeth Allen, a senior credit officer with Moody's.

"Despite management's commitment to deleveraging, the (negative) outlook incorporates
near-term uncertainty over the timing and magnitude of such deleveraging," she added.

Hutchison has raised a combined $7.1 billion from the international debt markets this year through a $1.5 billion 10-year bond in April; a $3 billion dual-tranche bond maturing in six and 10 years in September; and this latest $2.6 billion euro-denominated seven-year issue. All three deals are viewed to have priced tight versus its existing paper.

Deutsche Bank and HSBC have been involved in all three deals, with the third bookrunner spot taken up by J.P. Morgan on the April transaction and by Barclays Capital on the September deal.

Like Hutchison, Kexim has issued three separate international bonds this year: a $2 billion five-year deal in January; a $1.5 billion 5.5-year deal in July; a SFr500 million ($483 million) three-year bond in October.

¬ Haymarket Media Limited. All rights reserved.
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