PCCW - four letter word for bond investors?

The Hong Kong telco unsettles bond investors with plans to raise funds in euros and sterling.

The Baa1/BBB rated credit appeared to be backtracking rapidly last night (Thursday) after existing holders of its debt reacted badly to news of plans to raise new funds. Investors said that Barclays and Salomon Smith Barney had already begun to pre-market an Eu300 million to Eu500 million 10 year deal and an unspecified second tranche of sterling bonds before the company announced that it "had no definite plan to firm up any financing at this point in time."

At issue is the fact that the company had categorically told investors in its two recent dollar trades that it had no more plans to raise fresh funding from the bond market ahead of the new year, let alone before the last trade had even reached its settlement date. While the two lead managers have been commended by rivals for stealing a march on the competition and structuring a deal that certainly makes sense from a pure financing perspective, the consensus view is that PCCW-HKT has once again highlighted the kind of credibility issues which destroyed its share price and may now widen its bond spreads.

As one observer comments, "PCCW is rapidly in danger of becoming the APP of the investment grade bond markets. This is not the kind of behaviour expected of a credit rated at this level. What was it thinking of? No borrower builds long-term investor relationships by going back on its word in order to turn a quick buck."

In particular, critics argue that it will unravel the solid credit work it has managed to achieve since July, when its failed attempt to raise $3.8 billion attracted considerable criticism. By contrast, a subsequent $750 million 10-year deal led by JPMorgan in early November was applauded because the group had used the interim months to develop key client relationships and then price a market clearing deal which should have gave it a platform to build a fuller yield curve and pay down its $4.7 billion syndicated loan.

Investors were said to have been impressed that PCCW appeared to be adopting a prudent conservative liability management approach by terming out bank debt and locking in low cost fixed rate funding at an attractive point in the interest rate cycle. Although the group then swapped the whole amount back to dollar Libor, it had nevertheless done much to restore investor faith.

Critics say that diversifying into euros and tapping a new investor base at similarly attractive rates also makes sense, but the company should have stated that this would be its strategy from the outset.

"Bond investors have a completely different psychology to equity investors," one banker concludes. "They want the certainty of re-payment and a safe pair of hands. Startling everyone with a deal like this doesn't inspire much faith in the company's management abilities."

Unsurprisingly, spreads on PCCW-HKT's 7.75% November 2011 bond widened out 20bp on news of new paper, closing Asian trading at a bid/offer spread of 308bp/298bp over Treasuries. The deal had been re-opened in mid-November bringing the total issue size up to $1 billion from $750 million, with pricing at 98.583% to yield 7.958% or 315bp over Treasuries. This offering was also led by JPMorgan.

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