Sixt sense - part 2

In the second of a two part interview, Hutchison Whampoa group finance director Frank Sixt and Treasurer KS Chan discuss the development of a retail bond market, India and a growing love of euros.

Why haven't you tapped the retail bond markets in Hong Kong?

Sixt: We've financed quite regularly in the corporate bond market, but these markets remain relatively small.

Chan: The size of a Hong Kong dollar bond is HK$1bn ($128 million) or maybe a little more. It's not really a market with depth or long maturities.

What needs to be done to develop this further?

There need to be more participants. The investor base needs to be educated. Hong Kong people are not typically fixed income investors. This is changing slowly, but there's a lot of room for improvement.

Do you think the regulatory environment is not conducive enough for retail bond issuance?

The retail bond market is only starting to take off now, so it's a bit unfair to talk about these issues. The regulators and the banks are trying to cut down on all the tedious requirements like preparing a prospectus for every investor. We need time to see. I think it's a bit unfair to say that the regulatory environment is not good enough.

Are you quite optimistic of the prospects for the retail bond market?

It's more about developing the bond market as a whole rather than just the retail markets. The retail bond is just one product within the fixed-income markets.

Sixt: The retail bond market is a very new market and not necessarily a bad idea. But for so long as it remains a new market, it's going to be relatively illiquid. It needs time to mature. We all need to gain the experience of knowing who the market makers are, how markets are made and what impact liquidity will have on the performance of the bonds. For an issuer like us, it's not all about price. I need to understand how our issues will perform in the after-market. And I look at something like the Hong Kong retail market and there just isn't the volume and experience for me to be comfortable saying this is a market Hutchison would like to tap today.

So you're not that positive on the market then?

Sixt: The question to ask is: "what have you added by incorporating a Hong Kong dollar bond traded in Hong Kong?" I mean you have added the ability to pick up Hong Kong dollar assets, but what else? And once you start talking about a new retail customer base, then there a whole host of questions to be answered in terms of how large, liquid and actively traded this market is going to be. Also one needs to consider how the retail bond investor will react to the way his instrument trades. It's not necessarily a bad idea and may end up being very positive, but it is premature for us to take a lead in this area.

But you have the KS Li brand name behind you?

All the more reason for us to wait. I don't want to see an investor holding a piece of our paper with our name on it that starts performing badly because the market doesn't perform well. Size, liquidity, turnover and market-making all matter.

What do you think of rumours that Lehman Brothers will repackage your bonds and sell them to retail investors?

We had absolutely nothing to do with that. But anyone can buy a bunch of my bonds and sell them to their friends if they like and try and make a profit. It's nothing to do with us. It is just like covered warrants.

In that case, wouldn't it be even more important for Hutch to set its own benchmark rather than see someone come in and set an inappropriate benchmark for you?

No, because I think we can differentiate that this is not our benchmark. The way that Lehman Brothers' derivative Hong Kong dollar bond sells is not necessarily related to the way our underlying US dollar bonds are traded. If there's a negative experience, then it's nothing to do with Hutch or its bonds. If it is a positive experience, fine. Then we'll look at it and decide.

And then you'll say it is everything to do with Hutch's credit?

No it's not that simple. We need to plan the way we enter into markets and maximize the consistency of our performance. Being an early entrant into a new market with a new piece of paper is not necessarily a good idea. I'm quite convinced a retail bond could get us extremely attractive pricing. But I am not sure how this would impact our franchise with retail investors and so it's premature for us to embark on the adventure. I would hate to have a retail investor not be able to get out of a piece of paper in an interest uptick environment and say: "My god, I lost money on a Hutch bond."

I think the retail market will develop in an orderly fashion. But from our position it makes sense to wait and make sure the market has the characteristics that allow us to work in it with confidence. At the moment it's too early days.


You mentioned earlier the restructuring of the overall financing of your Indian telecom operations. What exactly have you been doing?

We've taken advantage of a number of regulatory changes to the kinds of debt financing available to foreign investors in Indian companies. We've refinanced some fairly expensive outstanding positions with new and better structures and dropped borrowing spreads by an average of well over 100bp. In addition, we've also decided to take a marginally greater amount of US dollar foreign exchange risk against the rupee.

Do you have any plans to list your Indian unit?

Not at this hour, although, it's something we'll always take a look at. India is a very large market to serve and the time will come when it will make sense for the company in order to let grow further from an equity platform. But not for the immediate future. Among other things, we're busy developing three new properties we bought in the last spectrum auctions. We have new networks being built in Chennai, Andhra Pradesh and Karnataka. And I don't see the merits of approaching equity markets to fund any of those right now.

What about the Maharashtra circle? With the BPL-Idea Cellular on the verge of falling apart, do you see yourselves moving in to take a stake there?

We will obviously examine any opportunities that come up. But we follow a strict discipline of looking at the costs of market entry and value of the markets we're going into. The choices we've made so far are not accidental. They're driven by a pretty strong view about profitability based on the demographics and economic characteristics of the population we would be serving.

Why did you drop plans to issue a 30-year dollar bond last year? Did you think it was too expensive relative to the levels you could get on the 10-year bond you issued at the same time?

Dropped is a bit of a strong word. What we have is the benefit of working from a position of relative strength and I really believe in the personal element of all this. You go out there and find out what investors are interested in. The key point is that you should never push markets further than they want to go at any point of time. A treasurer or finance director should never 'push rocks up the hill' unnecessarily. We found there was less demand than we anticipated at the longer end of the curve generally at that point of time. If you remember, markets were already starting to get volatile in the early months of last year and there was more reluctance because of the Asian association with our name. It became quite apparent that we could do our tranche, but the pricing we would be too steep over the pricing we were doing the 10-year at.

Are you still interested in doing longer-dated bonds?

It's interesting and it'll always be a personal challenge for me because the yield curve between our short-term and long-term debt is too steep for our credit quality. But I don't know what inroads I'll be able to make in my lifetime because there's still this difference of perception between US, European and Asian credits whether we like it or not. This is then reflected in investors' appetite for longer-dated paper.

The capital markets are very volatile right now and issuance at the longer-end is at an all time low. With recent credit experiences it's hard enough trying to do commercial paper (he laughs).

What markets and what parts of the yield curve appeal to you at the moment?

Look at where liquidity is. Asia is certainly one market as there's substantial liquidity here. Liquidity in the Euro-denominated corporate bond market also has to be increasing given what's happening with the currency. Sterling has also been an interesting market. Correspondingly, the more difficult market at this particular hour is the US dollar market.

Has your euro-denominated paper drifted back to Asia in the way that your dollar paper has?

No, I don't think so. No.

It's surprising then to hear you say that the euro-denominated market is a strong one for you, given that the tightest bid for Hutch bonds will come from Asia. Also as so many of the Europe telcos are heavily geared, sentiment towards them is pretty bad.

Well I would make the case quite strongly that we're not purely a telecoms company. That kind of perception gives us an opportunity to change investors' views.

But that doesn't make it a borrowing opportunity?

Why would you say that? The euro market is becoming more liquid and general market conditions are more favourable. If there's a misperception that "Hutchison is just another one of those telcos" then it's my job to tell investors that we are more of a utility and only have a debt to capitalization ratio in the single digits. This represents an opportunity for both of us. I can say: "Well why do you think we're a single A credit and all these companies you're fretting about are not?" It's precisely because we are not just a telco. So I think, yes conditions are better and liquidity is coming into the euro market.

But this sounds like a better opportunity to do a non-deal roadshow rather than a deal?

(laughing) We have no concrete plans at the moment.

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