For the second time in a week, HSBC appears to have stolen a march on its competitors with the launch of a $500 million trade for PCCW-HKT. The 10-year deal began marketing after Asia's close Wednesday and is expected to price later today (Thursday).
The transaction is being pitched at 240bp to 250bp over Treasuries, which places it roughly flat to slightly inside of the group's outstanding 2011 bond on either an interpolated Treasury or libor basis. At Asia's close, the group's $1 billion 7.75% 2011 bond was being bid around 113.5% to yield 207bp over Treasuries.
While news of the deal is likely to put some pressure on spreads, it should be viewed positively by the market since it underlines the group's continuing desire to re-finance what's left of its $4.7 billion syndicated loan at an attractive point of the interest rate cycle. While some analysts have been worried that the pendulum is beginning to swing in favour of equity investors and the resumption of dividends, the new deal shows the group is still conscious of the need to extend its maturity profile.
Management has said that PCCW intends to reduce debt by $1 billion by 2005 and would like to bring debt to EBITDA down from just over three times earnings to under 2.5 times. At the same time, it is looking to re-gain the single-A rating held by Hong Kong Telecom before its acquisition by PCCW.
In May, Moody's dealt these ambitions a blow by downgrading the group from Baa1 to Baa2/stable, lowering the rating below Standard & Poor's BBB/positive rating. Fitch, however, assigned a BBB+ rating yesterday with stable outlook.
In its rating assessment the agency said the group's positive free cash flow has helped improve its financial profile. According to Fitch PCCW-HKT, "maintains a high level of liquidity facilitated by strong cash generative operations. A prudent debt maturity profile and suitable levels of committed credit facilities also bolster the rating."
In the group's favour, it has stayed out of the market since it upset investors with plans to launch euro and sterling deals in December 2001. At the time, the transaction was considered an opportunistic deal too far, following two dollar deals and a promise not to re-enter the bond markets.
In November that year, the group completed two dollar trades via JPMorgan. The first comprised a $750 million 2011 issue, which priced at 360bp over Treasuries and the second a $250 million re-opening, which priced just over a week after the first at 315bp over Treasuries.