The diversified conglomerate returned to the dollar markets late on Monday with a deal whose timing and structure surprised everyone, but which nevertheless managed to appease investors and nudge the borrower's funding targets. For many observers Hutchison Whampoa's $1.5 billion 10-year 144a offering was almost a mirror image of a $750 million global bond for KDB last November. Both share a heavy underpinning of US investors attracted to the yield pick on a Treasuries basis and two borrowers that would have each felt they got good Libor-based pricing because of the steepness of the swap curve.
But for most market participants the two most pressing issues were whether the deal erred on the cheap side and just how much money lead manager Merrill Lynch made from its ballsy move to underwrite it.
After an accelerated 15-hour bookbuild, a $1 billion deal was upsized to $1.5 billion at New York's close on Monday after attracting an order book that is said to have fallen just shy of $5 billion. Pricing came at 99.536% on a coupon of 6.5% to yield 6.564% or 260bp over Treasuries. This was the tight end of a 260bp to 270bp pre-marketed range.
At the time of pricing, the A3/A rated company's 7% February 2011 bond was said to have been trading at 210bp bid. This meant the new issue was priced at a 50bp premium. Up to 30bp of this can be attributed to the steepness of the Treasury curve between eight and 10 years. The remaining 20bp was a new issue premium and given that most Asian bond issues have priced flat to secondary levels over the past year, many market participants felt Hutch paid up unnecessarily.
This feeling was further heightened by the trading pattern of the 2011 bond, which had been quoted at 185bp bid only a week before and only started to widen on Friday as news of PCCW's aborted bid for Cable & Wireless surfaced. Having opened Friday at 197bp bid, the 2011 widened out to a high of 225bp on Monday, before contracting back to 210bp at the time the 2013 priced. The successful completion of the deal and a statement from PCCW saying that it had withdrawn its bid saw the 2011 tighten back to roughly 200bp again by Tuesday's close.
"What I can't understand is why Hutch decided to press the button with this deal unless it was worried the PCCW issue would hang over the markets for weeks," says one banker. "From the borrower's point of view, timing was far from optimal and they gave away at least 20bp by hitting a volatile patch in the Asian credit markets."
On a Libor basis, pricing was considerably tighter. With 10-year swaps at 43bp, Hutch priced the 2013 bond at 217bp over Libor, very marginally outside its funding target of approximately 210bp to 215bp over. At the time of pricing, the 2011 bond was being quoted at 203bp over Libor, meaning there was only a 14bp differential between the two bonds on a Libor basis. And given that the swap curve is steep between eight and 10-years, Asian fund managers in particular, were said to have found this expensive.
Some bankers, however, argue that the deal was still cheap on a Libor basis. As one comments, "Because investors are being given additional yield on the back of a steep Treasury curve, it should be possible to squeeze pricing almost flat to Libor. At the longer end, the swap curve can be very flat because yield buyers outweigh asset swap buyers."
Hutchison Whampoa's Libor curve is relatively steep with asset swap demand for its 2007 bond keeping levels tight at 140bp over Libor, a 63bp differential to the 2011 bond.
As a second specialist adds, "The bank bid at the short-end keeps the 2007 in. It's a good pick-up for this investor segment when you think that a five-year loan from Hutch would come up to 50bp tighter."
The deal's distribution pattern underlines its strong appeal to yield buyers out of the US. Observers report that about 45% of the book went to US investors, with the balance comprising mainly Asian and a smattering of European accounts. Most observers believe that having been mandated on Friday, the lead went on to build a shadow book of up to $500 million worth of US orders by New York's close later the same day. Although this has been denied, most then carry on to argue that this set the momentum up in Asia for the deal's formal launch Asian lunchtime Monday.
For lead manager Merrill Lynch, completion of the transaction 15 hours later has got 2003 off to a spectacular start after a fairly miserable 2002. And at a time when virtually no benchmark Asian bond issue is ever led on sole books basis, the size of the deal and fees attached to it, rocket the bank straight to the top of the league tables.
In the run-up to the deal, a number of houses had been talking to the company, but only three of its closest relationship banks are said to have made it to the final hurdle - Goldman Sachs, HSBC and Merrill Lynch. Each one is said to have had a different view on how to handle a deal, with Merrill winning through because it advocated a hard-underwritten, accelerated transaction rather than a marketed, book-built offering. However, there is less agreement on whether it agreed to a firm backstop at 290bp over Treasuries, or actually bought the deal at these levels. Rumours that it made up to $20 million off the trade have also been greeted with some skepticism.
Most bond market practitioners believe a bought deal of such a magnitude to be highly unlikely because Hutch does not have liquid enough lines to withstand the whole market trading against the lead. "They would also have had to inform investors that it was a bought deal and in any case, net proceeds to the borrower will have to be disclosed in the documentation because this is a 144a transaction," one banker explains. "The only way to avoid doing this would be to sign a side agreement with the client and I just cannot see a borrower of Hutch's calibre allowing it."
So too where fees are concerned, most believe Hutch is unlikely to have paid more than 40bp and certainly no more than 62.5bp, which would have netted Merrill just over $9 million. "Merrill might have got slightly higher fees in return for back-stopping the deal, but I can't see Hutch paying up that much," says one banker. "If Merrill made $20 million from this trade, then that's more in up-front primary market fees than any of the top debt houses made over the whole of 2002."
Either way, the whole market has applauded Merrill's execution of the deal, which was said to have been extremely smooth and impressively swift. Its willingness to put $1 billion of its own capital to work has also been highlighted. And in the kind of calculated gamble for which Hutch's corporate strategy is likewise famed, Merrill got lucky as spreads snapped back and a 290bp backstop bid was never tested.
For the borrower, the overriding factor would have been to achieve certainty of funding and a benchmark issue size. After scrapping plans for a euro-denominated deal last autumn because of volatile markets and a recalcitrant investor base, Hutch was aware it needed to be unequivocable in re-stamping its mark with investors this time round. Having achieved these aims, analysts now believe the company has positioned itself well to continue its heavy re-finance schedule for 2003. The maturity of two exchangeables means that $5.6 billion is coming due.
In a research report published yesterday, HSBC said the transaction should see, "Hutchison's average debt maturity profile lengthen from about 5.6 years to 6.3 years, while the average cost of debt increases from around 5.2% to 5.5%.
"Nonetheless," it adds, "we expect Hutchison's overall debt will rise as the company draws down on its loans for implementing its 3G business. As such, its credit protection measures could weaken over the near to medium term unless Hutchison opts for non-core asset sales."
Analysts conclude that while Hutch's spreads still look attractive relative to the company's single-A rating, they are likely to remain volatile. The 2011 bond, for example, hit a peak of 300bp over Treasuries late last autumn on the back of 3G concerns and analysts believe it is now fairly fully valued at a 100bp premium to MTR Corp.
But a successful deal saw the company's whole curve tighten yesterday, with the 2011 tightening back down to just below 200bp and the new 2013 bond to about 245bp bid.