Jardine Strategic sets record for debut 144a bond

The conglomerate has managed to secure the lowest outstanding coupon in the Hong Kong credit universe.

Priced Friday lunchtime (GMT), the Baa1/BBB+ rated credit launched a maiden $300 million ten year bond offering at 99.099% with a coupon of 6.375% and yield of 6.499%, equating to 225bp over Treasuries.

At these levels, Jardine Strategic's deal breaks the existing record held by Castle Peak Power, whose $172.5 million transaction due August 2003 has a coupon of 6.870%. It also easily surpasses all Hong Kong borrowers that have accessed the market this year including its own higher rated subsidiary Hongkong Land and Hutchison Whampoa, both of whom got 7% coupons for their respective 10-year deals earlier in the year.

Bankers say that the low absolute borrowing cost Jardine's has been able to achieve should stand as the true measure of its success, rather than the slightly higher spread the company was forced to pay to combat volatile market conditions.

The US government's decision to abandon new auctions of 30 year Treasuries on Wednesday led all credit spreads to widen as investors factored in a drop in Treasury yields. As a result, top Hong Kong names such as the MTR Corp and KCRC widened by about 3bp and the two immediate benchmarks affected by Jardine's deal - Hongkong Land and Hutch - by about 10bp to 15bp.

At pricing, Hongkong Land was trading at 170bp bid (55bp tighter than Jardine Strategic) and Hutchison Whampoa at 235bp bid (10bp wider). Earlier in the week, the former had been bid at 162bp over Treasuries and the latter at 221bp over.

Under the lead of Goldman Sachs, HSBC, JPMorgan and UBS Warburg, books were closed early in the Asian afternoon to make sure that demand would not be compromised by an unstable Treasury market following the release of US unemployment data later the same day.

"This was a deal that was not very reliant on US demand and the borrower was not looking to increase the deal," one banker comments. "So as soon as books were covered, it was felt there was no need to drag things out any further just to get a certain level of oversubscription."

With a final order book of $350 million and a total of about 70 tickets, allocations were split roughly 80% Asia, 10% Europe and 10% US. By contrast A-/A3 rated Hongkong Land had a slightly more international order book, with 61% of bonds placed in Asia, 26% in Europe and 13% in the US.

Private banking demand was also said to be much larger for Hongkong Land, although the parent also saw about 30% of the deal go to the same investor segment. Banks accounted for a further 40%, with asset managers on 20% and corporates and insurance funds the remainder.

"Private banking was never going to be as strong for this credit, because a lot of funds are capped at the single-A limit and can't buy below that level," one banker reports.

Where geographical distribution was concerned bankers also say that it was difficult to get US accounts to focus on the credit. "It was a small deal, a debut issuer and a triple-B rated credit that was pricing at tight levels relative to comps in the US market," says one.

A second adds, "Over the last two weeks, there's been huge issuance in US dollar-denominated paper. The week before last, for example, saw $28.5 billion of issuance. In this context, Jardine's was small fry as far as US investors were concerned."

A large volume of jumbo bond offerings at a time of Treasury volatility has made pricing at the wider end of indicative levels a familiar pattern. In Jardine's case, the borrower set out at a level of 200bp to 210bp over and then widened the spread out to 225bp on the day of pricing.

"Because this was a borrower looking at the market in fixed rate terms, there was the flexibility to widen the spread, without it seeming a major sacrifice," a banker relates. "It would have been possible to price the deal at 210bp, but there wouldn't have been much of a guarantee that it would perform in the secondary market."

The strong secondary market performance of Hongkong Land's deal in April was said to be another key factor attracting investors to the new deal. "There was only one switch order," one banker concludes. "Banks have a lot of underutilized lines to the group and they had had a good experience with the first deal earlier in the year. This is what bought them in."

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