Sixt sense - part 1

In part one of a two part interview, Hutchison Whampoa group finance director Frank Sixt and Treasurer KS Chan discuss liability management, spread levels and why the rating agencies forward-looking views are wrong.

What are your funding requirements for the rest of the year?

Sixt: Most of our funding requirements and particularly in telecoms have been squared away in the last twelve months. We've also restructured the overall financing of our telecommunications interests in India taking advantage of new opportunities to lower the cost of debt there.Frank Sixt So we now have fairly modest requirements associated with new operations we've taken on in our ports division, for example, or re-financing that might come with various acquisitions. Basically we're back to our normal position of continually eying the debt markets for opportunities to reduce the cost of debt capital and to improve the structure of our balance sheet. However, we're not looking for any net new capital raising. Anything you see from us over the next six months will be a re-financing of one sort or another.

If it's advantageous to refinance any part of our existing financing structure, then we might do it if we can achieve an attractive cost of funds or maturity profile. But there isn't any definitive refinancing requirement for the second half of this year. And this isn't that surprising given that our cash and cash equivalents (including marketable securities marked-to-market) totaled $18.6 billion at the end of last year. Our real net debt (ratio of total net debt to total capital) was less than 1%.

How do you manage your currencies relative to revenues? Do you hold a lot in HK dollars?

Our revenue mix is biased towards Hong Kong dollars and US dollars, with a growing exposure obviously to euros, sterling and other minor currencies. Our accounts are denominated in Hong Kong dollars and at the end of the day we manage the liabilities side of the balance sheet to minimize any short-term exposure against the US dollar. But more and more we aim to match the longer end of the liability profile to the long side of the asset profile. What we don't do is just match our debt profile to the currency and maturity profile of available liquidity pools. We look at where capital is employed across our various businesses. Generally speaking we've always got room to move back and forth between dollar, euro and sterling liabilities depending on market opportunities.

So you raise money in the currency you want as opposed to raising US dollars and swapping it back to HK dollars?

Yes, that's right. We're a little different from a lot of our peers in Hong Kong in that we have substantial businesses in a 130 countries. We aim to manage the parent's balance sheet taking account of the asset profile of all the businesses. So we're active in all markets. We're probably the most active Asian issuer in the US dollar market. We were the first ever Asian corporate to tap the euro market. Our UK subsidiaries have tapped the sterling bond markets to finance ports. In Canada, our oil company has been in the UD dollar energy bond markets for a long time. All of this distills together to create the consolidated balance sheet.

The last time you tapped the US dollar bond markets was in January 2001. Have you tapped any major sources of financing since then?

We've been most active financing our 3G operations. We closed a GBP3.2 billion project financing facility in the second quarter of 2001. Then about a month ago we closed a Eu4.2 billion mixed project and partially guaranteed facility to finance our operations in Italy. We also refinanced a major Hong Kong dollar facility through a syndicated loan for HK$12 billion.

Chan: We've also done two rounds of financing in Australia for Hutchisom Telecom Australia (HTA). The first one was a straight bond and the other one currently in progress is an A$600 million convertible.

Sixt: Given the scale and exposure we have in so many markets, financing is an ongoing progress and demands a constant level of activity. In many ways our job is to be ready to transact any time. If a market looks attractive, we don't have three months of lead-time to hire people to do prospectuses or offering documents. We're always ready to go in most of the major markets we could access.

What's your current view of the Asian bond markets?

The Asian markets are quite borrower-friendly right now with abundant liquidity and investors who are finding it difficult to find yield. For good names there hasn't been scarcity of liquidity and pricing has been quite favourable.

Do you think any events might change that?

Well the capital and credit markets in Europe and America have been buffeted by a lot of event risk. They've gone through periods of tightening and expanding at levels of volatility we've never seen before. But my sense is that we haven't seen that much in Asia. The Asian financial crisis has by and large worked its way through the economies and we haven't had any event-risk driven shocks to the credit markets. Asian credit markets have been more stable over the last 20 months than the US or European markets. Strangely I also think that what happened in the US is less likely to happen here. We could debate this for a very long time, but I think the likelihood of a WorldCom or an Enron is lower here than in any other part of the world.

What do you think of your spread levels?

I would never like to say I'm pleased with our spread levels as there's always room for improvement. But I do think the publicity surrounding everything we've done in telecommunications has been disproportionate to the importance of telecommunications to our overall credit profile. Our spreads are a further out from where they should be if the company was properly understood. So I consider it my ongoing job to maintain a balanced focus in terms of the utility backbone, which supports Hutchison. But I don't want to de-emphasise our telecoms division or the fact that we're reinvesting earnings from prior years into it.

Why do you think your spreads have been getting wider and wider relative to MTRC and KCRC? Historically you used to trade 10bp back. Then at the beginning of last year it was 40bp back and recently 80bp back.

Part of it is informational, part of it is communication and part of it is timing. If there is any positive impact from the telecoms investment cycle, it will get reflected very quickly in our spreads. But right now we're in a situation where the rain doesn't distinguish between the just and the unjust, it rains on everyone.

You must find that incredibly frustrating?

Yeah, but it's just part of our job to make sure we're properly understood.

What do you think of the recent ratings action by S&P, where the ratings outlook on your A rating was cut to 'negative' from 'stable'?

The market viewed it as a short-term buying opportunity. As I recall, spreads two weeks later were narrower than they were before the announcement. The ratings agencies are entitled to their forward-looking views whether it's with respect to Hong Kong, Hong Kong's property business or the telecommunications sector. The rating was maintained because if you look at our credit quality and our coverage ratios, we are deserving of the category. We are very deserving of the category on any metric.

However, one of the issues the rating agencies always have to wrestle with is how they deal with factoring their own forward-looking views into the ratings system. Right now they do it through 'outlooks'. But I don't find it that appropriate. An 'outlook' implies that something will happen. If a rating is based on a forward-looking view, which takes into account the most negative possible combination of circumstances, I don't think it's right to treat it as an outlook, because unfortunately the rest of the world views it as a ratings action. It would be probably more appropriate for the agencies to issue ratings based on the numerate credit analysis they perform on the issuer and express reasoned opinions on the sector, risk, etc. But I find it a bit troublesome when they actually turn that forward-looking opinion into a ratings action. Obviously I do not agree with their forward-looking view or we wouldn't be making the investments we are.

On the other hand, there's nothing wrong with their forward-looking view. A lot of banks have the same forward-looking view and are not extending credit to the telecommunications sector at this hour.

Where are you in the investment cycle with your telecoms projects? What's your optimal gearing going to be?

Gearing is about 10% at the moment, which is low for the industry and over time, I could foresee us moving toward the low 20% level. But a modest amount of leverage is good for the efficient running of any business. What we do try to make sure is that our risk profile is mitigated. So we maintain a low level of gearing and a high level of liquidity. But this does have has an earnings cost, however, since liquid investment grade assets don't generate great returns these days. Nevertheless, it's the right thing to do.

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