One of only a handful of Asian borrowers ready, willing, or able to take advantage of shifting market sentiment, Hutchison Whampoa sets off on roadshows for a $1.5 billion 10 and 30 year 144a transaction on Tuesday.
Backed by lead managers Goldman Sachs, JP Morgan and Merrill Lynch, the A3/A-rated credit is said to remain flexible about tranche size and will wait to determine investors' response before making a final decision. Two teams have been put together, with CFO Frank Sixt leading one set of officials who will begin presentations on the US West Coast US Tuesday and his deputy Don Roberts leading Hong Kong presentations on the same day. Sixt will then move to Boston on Wednesday and New York for Thursday, while Roberts will be in London on Wednesday, Frankfurt Thursday and then New York Friday. Pricing is expected to take place the following Monday.
"Hutch is one of those credits which always maintains a high state of preparedness to tap the market," one banker explains. "In terms of this deal, it's been seriously considering it for the last two weeks."
All observers credit Hutchison for taking the initiative to re-finance bank debt at a time when demand for US A-rated credits is exceptionally strong. The Federal Reserve's latest 50bp rate cut earlier this week has prompted a strong rally in Treasuries and a corresponding search for yield a little further down the credit curve.
As one banker puts it, "There has been $90 billion of high grade corporate issuance in the US alone during January. It's a phenomenal amount and a high percentage has been jumbo A-rated deals. Investors want to retain yield, but they don't want to move too far down the credit curve to get it."
From a financing perspective, Hutch's decision to act before future potential rate cuts has also been applauded. Stephen Cheng, UBS Warburg's head of fixed income research comments, "The old long bond is now trading at 5.45%. This means that Hutch should be able to issue 8% all-in for a 30 year deal. It's a great financing decision.
"When you take into account the fact that the company has already raised $2.5 billion so far this year from an exchangeable bond, it shows how prepared it is to get re-financing in place while spreads are still looking ok and there is momentum in the market. The US slowdown has not begun to affect exports yet, so it makes sense to act now."
One of the most interesting aspects of the transaction will be to see whether the company can re-price its credit curve back in line with quasi sovereign borrowers such as the Mass Transit Railway Corporation (MTR) and Kowloon Canton Railway Corporation (KCRC).
In May last year, both Moody's and Standard & Poor's changed the company's credit outlook to negative because of the potential debt funding costs for its joint-venture with TIW to build-out a 3G network in the UK. Since then, the company's spreads have moved out from a 10 to 15bp differential behind MTR Corp to a 40bp one.
Where, for example, Hutch's benchmark 2007 bond is trading at a bid/offer spread of 180bp/170bp over Treasuries, the MTR's recent 2010 is quoted at 146bp/136bp. At the longer end of the curve, the difference is even more noticeable, with Hutch's 2017 quoted at 228bp/213bp and MTR's 2018 at 154bp/144bp, a roughly 70bp differential.
However, despite the fact that the differential is more pronounced at the long end, bankers believe that more value currently lies at the short end. "The differential between Hutch's long and short bonds has closed somewhat and the curve is more flat than it used to be. It presents the leads with an interesting pricing opportunity."
Key will be investors' view of the region's supply/demand dynamics. Supporting strong demand is the fact that Hutch is ranks as one of region's few repeat and, therefore, liquid, dependable high grade issuers. Should the transaction price as expected, the company will have $9 billion of outstanding dollar-denominated debt (including exchangeables), surpassing the APP group and the Republic of the Philippines as the region's largest borrower for the first time.
However, as some bankers point out, since both of its recent $3 billion and $2.5 billion exchangeables are considered more equity-related instruments, the headline figure is slightly misleading.
It's recent recourse to the capital markets may also count against it in the sense that investors will have fuller lines and it is bringing another large deal. MTR Corp was able to price a 10 year deal in early November without recourse to a new issue premium. It did so by playing heavily to its home audience and keeping the issue size down to $600 million
Hutch by contrast, looks likely to target US investors, who have previously been stickier about pricing than their counterparts in Europe and Asia. But it will be hoping to repeat the success of its $2 billion issue of July 1997, which ranked as the world's largest corporate Yankee and symbolised a sense of confidence in Hong Kong's new SAR status.
Led by Goldman Sachs and Merrill Lynch, the company generated $7 billion in orders for a four tranche deal of 10, 20, 30 and 40 put 12 bonds. The two US investment banks have traditionally monopolised the company's business and the forthcoming deal proves no exception. Where it does differ is with the incorporation of JP Morgan for the first time. Such a coup has been attributed to the combined force of Chase's strong lending relationship and JP Morgan's DCM edge, which has seen it push its way back towards the forefront of debt issuance in the region.
Bankers conclude that forthcoming roadshows should offer the company a suitable platform to impress on investors the fact that it is more than just a telco. "Less than 10% of EBITDA is generated from the telecoms sector," one concludes. "And as a result of its sales in the sector, it has now built up a net cash position of about $8 billion to $9 billion."