A quasi-sovereign high-quality name with a stable business in a defensive sector, Kowloon-Canton Railway Corp (KCRC) was always going to attract a reasonable following in a market where there is still a lot of uncertainty about the timing and scale of an economic recovery. Add in the rarity factor that comes from being a double-A-rated government-linked issuer from Hong Kong -- it has been eight years since KCRC was last in the international bond market with a new issue -- and you get an almost perfect mix for a tightly priced deal.
The owner of Hong Kong's above-ground railway network attracted approximately $4.2 billion of demand, which allowed it to sell $750 million worth of 10-year bonds -- the top end of an indicated deal size of $500 million to $750 million. The deal was priced flat to slightly wider than the cash curve implied by comparable issuers, but even so, nobody was particularly surprised when the new bonds continued to tighten in the secondary market after pricing at the very tight end of guidance.
"It is the kind of predictable, safe issuer that appeals to buy-and-hold investors," a source close to the offering said.
"From a portfolio perspective, it is good to see something different than another deal from Korea," added an observer.
The deal was priced early Tuesday morning Hong Kong time to yield 195 basis points above the equivalent US Treasury, after being launched some 16 hours earlier with a guidance of 200bp plus or minus 5bp. Initial whispers had put the potential spread in the "low 200s". Citi, Deutsche Bank and HSBC acted as joint bookrunners.
At that spread, the new bonds commanded virtually no new issue premium compared with MTR Corporation's 2014 bonds, which were regarded as the key comparable given that they are part of the same group following a government-induced merger in 2007. KCRC no longer provides any actual railway services, but leases its railway lines to MTRC, which is in charge of making sure the trains run. MTRC also operates Hong Kong's subway system. At the time of the pricing, the MTRC 2014s were trading at a spread of 175bp over Treasuries and after adding 5bp-10bp to make up for the five-year longer maturity, and the fact that MTRC is rated one notch above KCRC, this leaves a new issue premium of no more than 10bp.
The price looked even tighter compared with the Hong Kong 2014 sovereign which, at the time of pricing, was quoted at 155bp over Treasuries. Aside from the maturity and new issue premiums, quasi-sovereigns typically also command a premium versus the sovereign (they are one step removed from government support), which globally tends to be between 50bp and 75bp, according to industry insiders. For KCRC this would imply a pricing of at least 210bp over without adding any new issue premium.
However, the high-quality of the KCRC name and the scarcity of such paper meant that the company was able to get away with this pricing.
Indeed, the spread tightened to 183bp-185bp in the Asian morning yesterday while the overall market remained quite weak, and when buyers returned both to the bond and equity markets in the afternoon, the spread came in another few notches to about 178bp-180bp.
The Reg-S/144A-registered bonds carry a coupon of 5.125% and were reoffered at 99.659 to yield 5.169%.
They were launched off KCRC's recently established medium-term note programme, which is rated Aa3 by Moody's and AA+ by Standard & Poor's, both with a stable outlook. The quasi-sovereign status was underscored by a letter from the Hong Kong government confirming its intention to maintain "full ownership" of the company, something which seemed to have been appreciated particularly by Asian investors who, led by Hong Kong-based accounts, took 66% of the deal -- a larger Asian take-up than on other recent deals from the region. For example, only 51% of Hutchison Whampoa's $1.5 billion bond issue in early April went to Asian investors.
US-based investors bought 19% of the KCRC deal, while European investors took the remaining 15%. In terms of investor type, banks took 21%, central banks and sovereign wealth funds 6%, fund managers 48%, insurance companies and pension funds 9% and private banking 16%.
The proceeds from the sale will go towards the repayment of a $1 billion dollar-denominated bond that matures in July. The company has already issued a combined HK$2.4 billion ($310 million) off the MTN program since it was launched last month.