Li Ka-shing's CKI upsizes perpetual bond

Infrastructure group takes advantage of low rates to lock in long-term funding.

Hong Kong billionaire Li Ka-shing’s Cheung Kong Infrastructure (CKI) raised $1.2 billion from the sale of an upsized perpetual bond on Monday, taking advantage of investors' ongoing search for yield at a time when Treasuries remain stuck near 50-year lows. 

The fact that fixed-income analysts described the deal structure as "issuer friendly" appears to have had little impact on the scores of private banking investors who like perpetual bonds by strong investment grade names. As a result, the order book closed at the $2.6 billion level, prompting the issuer to raise the deal size from $1 billion to $1.2 billion. 

Proceeds are being used to repay a $1 billion 6.625% perpetual bond that has a call option in March 2016. However, analysts believe CKI is unlikely to call the new perpetual, non-call five offering since it has a fixed-for-life structure rather than the traditional cliff structure, with a coupon step-up in year five. 

This makes the BBB rated deal very attractive from CKI’s point of view, as it has been able to lock in ultra-low funding. However, because the company has no incentive to call the bonds, investors could end up holding the asset in perpetuity. 

What appears to be a high yield at a time of ultra low Treasury rates may not look quite so attractive if rates start rising as the Federal Reserve still hopes they will.  

There is also no doubt the deal benefited from rarity value, with the Greater China primary market unusually quiet as borrowers re-finance their dollar-denominated debt in China's domestic bond market. 

The bookrunners started marketing the deal on Monday with initial guidance of 6%, before tightening it  by some 12.5bp to 5.875%. Final pricing of the perpetual bonds was settled at 5.875%.

“The company was very happy with the pricing of this transaction as the coupon rate is lower than their last deal,” said a source.  “Investors were comforted by the fact that they are such a household name.”

“This is a name people want to own in their portfolios and it's helped to reopen the primary market in the region,” the source added.

In terms of comparables, Cheung Kong has an unrated 5.375% 2049 deal with a call option in January 2018. This was trading on a yield to call of 5.22% on Monday. 

Hutchison Whampoa also has a 6% subordinated perpetual with a call option in May 2017. This was trading on a yield to call of 2.8% on Monday.

Most of the Hong Kong and Greater China perpetual universe is trading well below 6%, which makes the headline yield of CKI's new deal all the more enticing.

The company initially planned to redeem its $1 billion 2010 bonds last year, but did not launch the buyback due to poor market condition at that time, according to people familiar with the company.

In a research note, rating agency Standard & Poor's said the latest hybrid securities have intermediate equity content. It said it will treat 50% of the principal as equity and 50% of the distributions as dividends in its financial ratio calculations.

In a statement to the Hong Kong stock exchange, CKI company secretary, Eirene Yeung, said it plans to use the proceeds to purchase new shares to be issued by the company. The proceeds from the issuance of new shares will be used to repurchase the outstanding $1 billion 6.625% bond

Deutsche Bank was sole global coordinator with HSBC and JP Morgan as joint bookrunners.

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