Li & Fung sells $400 million bond amid tough markets

The Hong Kong bluechip leans on anchor demand following a non-deal roadshow to print a 10-year deal, shrugging off a significant widening in spreads during the bookbuilding.

Li & Fung, the Hong Kong trading and sourcing company, has raised $400 million from a 10-year offering -- its second US dollar bond ever. Arguably, the company could have chosen a betting timing for the transaction given the deterioration and heightened volatility in global markets over the past week. When Li & Fung announced the bond yesterday morning, Asian investment grade spreads were about 5bp-10bp wider than the previous day and during the marketing they widened another 10bp-15bp.

However, the company had received strong interest from high-quality real money accounts on the back of a non-deal roadshow in Singapore, Hong Kong and London on Monday and Tuesday this week, and didn't want to pass on the opportunity to cash in on that. One source also noted that many of the investors participating in the deal were of the buy-and-hold kind, which tend to be less affected by market volatility. It also would have helped that Li & Fung is a well-known, and well-regarded, Hong Kong bluechip with a long history and at the same time a rare issuer in the international debt markets. Its debut $500 million 10-year dollar bond in May 2007 attracted $2 billion worth of demand.

In a ratings notice issued yesterday, Moody's said Li & Fung's rating outlook is stable, reflecting its "stable business performance and track record of integrating acquired businesses. It also incorporates the management's strong commitment to the rating." The agency assigned an A3 rating to the bond, which is in line with Li & Fung's issuer rating. Standard & Poor's gave it a rating of A-, also with a stable outlook.

A banker involved in yesterday's transaction said the company's willingness to make swift decisions with regard to the issue enabled it to make the most of the issuing window that was actually there.

And it seems the company and its joint bookrunners - Citi, HSBC and J.P. Morgan - were right in their belief that a deal could get done. When the books closed, the offering had attracted $675 million of demand from more than 75 accounts - not quite the oversubscription ratio it achieve last time, but not bad given the poor market environment.

The senior, unsecured Reg-S deal was announced yesterday morning Hong Kong time as a US dollar benchmark transaction with an initial yield guidance of Treasuries plus 170bp area. Before Asia closed, this was revised to a $400 million offering yielding 170bp over Treasuries, which gave the market clarity on the deal and helped hold the book together even as spreads continued to widen during London trading hours.

The price was finalised before 9pm Hong Kong time and resulted in a coupon of 5.25%, a reoffer price of 99.854 and a yield-to-maturity of 5.269%.

The spread of 170bp over the 3.625% Treasury due in February 2020 translated into a new issue premium of about 10bp versus Li & Fung's own 2017 bonds, after adjusting for the difference in maturity. At the time of pricing, the 2017 bonds were trading at a spread of Treasuries plus 80bp.

Investors also used the 2019 bonds issued by Hutchison Whampoa and Swire Pacific as benchmarks. During they bookbuilding, Hutchison widened to 185bp over Treasuries from 170bp, while Swire widened to 150bp from 140bp. Interpolating those to a 10-year maturity would add another 5bp to both bonds, according to a banker.

About 90% of the deal was bought by Asia-based investors, which isn't too surprising given that the deal closed shortly after lunch UK time. London-based investors were also occupied with a lot of other issues yesterday, including a UK election, escalating riots in Greece and tumbling share prices all around them. Still, European investors did pick up 10% of the deal.

In terms of types of investors, 35% went to fund managers, 33% to insurance and pension funds, 17% to banks and 15% to retail accounts.

Li & Fung told investors it would primarily use the money for business developments and acquisitions, but didn't specify.

"Over the next two to three years, the rating on Li & Fung would be most influenced by the speed at which the company undertakes acquisitions, its ability to quickly integrate new entities into its current operations without interrupting revenue generation, and its appetite for further leverage," Standard & Poor's credit analyst Judy Kwok-Cheung said in an announcement. "We believe the company has a good track record of smoothly integrating acquired entities. Nevertheless, our current rating does not take into account the possibility that any single substantial acquisition could significantly alter the company's operational and financial risk profiles."

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