International Container Terminal Services (ICTSI) sold a $300 million hybrid note callable in year 4.25 on Thursday evening, the company’s maiden senior perpetual offering and also Asia’s first this year.
The Philippine port operator — controlled by billionaire Enrique Razon — priced the offering at a yield of 6.375%, which is around 12.5bp tighter than its final price guidance, according to a term sheet seen by FinanceAsia. The deal is part of the company's liability management programme.
Approximately $230 million of the Reg S-only hybrid instrument raised were used to redeem its existing 8.375% subordinated perpetual paper that is callable in 2016, indicating a cost saving of 2%. The borrower paid a cash price of 107.625 for the tender of those bonds, said a source familiar with the matter.
The extra $70 million in new money raised will be used for refinancing and other general corporate purposes.
"This is part of our ongoing capital management program," Rafael Jose Consing, treasurer of ICTSI, told FinanceAsia. "There were two objectives that we were trying to achieve – first was to extend the duration of our call option on the hybrid equity, and second, reduce our cost of capital.”
The perpetual bond, which international accounting standard rules count as equity, will strengthen ICTSI’s balance sheet without diluting existing shareholders. In 2011, the company issued its first subordinated perpetual.
"Following our inaugural hybrid issue in 2011 which came in a subordinated format, further clarifications from the IFRS allowed senior perpetual notes to be considered equity, subject to certain conditions being met," Consing said. He added that the senior instruments can achieve significantly tighter pricing than its subordinated peers.
“This transaction sought to monetise the value of that "accounting arbitrage," said Consing.
The senior instrument has a call option on May 5, 2019 and subsequent calls on every distribution payment date thereafter, according to the term sheet. From the first call date until the step-up date of May 5, 2024, the bond resets at the prevailing five-year US Treasury rate plus an initial credit spread of 499.3bp.
From the step-up date and every five years thereafter the note resets with the standard terms (five-year UST rate plus initial credit spread) and an additional 250bp, increasing the likelihood of it being called.
The bond, which began its tender process almost two weeks ago with European and Asian investors, sought to capture an ideal issuance window.
Asia’s markets — plagued by volatility in recent weeks due to the tanking of oil prices to below $50 a barrel, rising defaults with Chinese property companies and the Swiss National Bank’s surprise decision to un-peg its currency from the euro — stabilised on Thursday, providing an perfect opportunity for ICTSI to tap the region’s debt capital markets.
“The bond came out well before the ECB [European Central Bank] announcement,” said a source familiar with the matter. “The rumours on the ECB in terms of what is going to be announced gave investors comfort that there’s going to be quantitative easing.”
On Thursday evening, Mario Draghi, president of the ECB, announced he would pump €1.1 trillion ($1.25 trillion) at a rate of €60 billion a month into financial markets until September 2016, in an attempt to prevent the fragile eurozone economy from grinding to a halt.
The perpetual securities were widely distributed with fund managers accounting for 69%, banks for 7%, insurance for 1%, and private banks for 23%. By geography, Asia took up 86% with Europe at 14%.
In secondary markets, ICTSI’s bond has traded up from a reoffer price of 99.551 to 101.25 on Friday morning, according to Bloomberg bond data.
There were $17 billion worth of dollar-denominated hybrids raised in Asia ex-Japan last year, more than three times the volume issued in 2013, according to Dealogic data.
Some of the more prominent corporate deals included the likes of Thailand's biggest publicly listed oil and natural gas explorer, PTTEP's $1 billion subordinated perpetual bond last June and Chinese real estate company Beijing Capitaland's $350 million hybrid offering last November.
Citi and HSBC were the joint bookrunners of the deal.