Swire houses new dollar bond

Does rarity value compensate for aggressive pricing?
Hong Kong's original Swire House, 1870's
Hong Kong's original Swire House, 1870's

Swire Pacific returned to the dollar bond market for the first time in almost exactly two years on Monday with a $500 million 10-year Reg S deal that priced very close to its outstanding curve.

The A3/A-/A- rated credit felt confident in pushing for fairly aggressive pricing after building up a $1.6 billion order book on the back of indicative pricing around 190bp over Treasuries. This was subsequently revised to 2.5bp either side of 172.5bp, leading to a slight drop off in investor demand to roughly $1.4 billion. 

Final pricing came at 99.893% on a coupon of 3.875% to yield 3.888% or 172.5bp over Treasuries. Syndicate bankers calculated fair value around the 170bp level, which means the new deal has offered a slim 2.5bp pick up.

A total of 108 accounts participated with a split of 92% Asia and 8% Europe. By investor type, banks took 40%, insurers 20%, fund managers 38% and private banks 2%.

The group's outstanding 4.5% October 2023 bond was trading at 144bp over Treasuries at the time of pricing, equating to a G spread of 162bp and a Z spread of 163bp. Ahead of pricing, one fixed-income analyst calculated fair value 10bp wide of Swire's existing 2023 bond on a Z spread basis.

On this measure, the deal offers a roughly 7bp premium having come at 170p on a Z spread basis. 

Swire also has a 4.5% June 2022 bond outstanding. This was trading on Monday at 122bp over Treasuries and 160bp over on a Z spread basis, equating to a fairly flat curve between its 2022 and 2023 bonds.

The two other main comparables are Hong Kong Land and Hutchison Whampoa. The latter has the same A3/A- rating as Swire, although bankers argued that its telecom element makes it a marginally weaker credit. 

Its 3.615% October 2024 bond was trading on Monday at a mid-spread of 162.5bp over Treasuries, equating to 170bp over on a Z spread basis. Fixed-income analysts had earlier calculated that fair value for the new Swire bond should be about 5bp wider to account for the one-year maturity extension.

In Z spread terms, Hutch's own interpolated curve shows a 13bp differential for the 33 months between its October 2024 bond and its 4.625% January 2022 bond, which was trading Monday at 115bp over Treasuries, or 157bp as a Z spread.

Hong Kong Land, meanwhile, has a one-notch higher rating of A2/A. Prior to pricing the same fixed-income analyst suggested that Swire should trade about 18bp wide of Hong Kong Land on a Z spread basis. 

This is where it priced on a Z spread basis given that Hong Kong Land's 4.5% October 2025 bond was trading Monday at 155bp over Treasuries or 157bp as a Z spread.

Hong Kong Land's interpolated curve shows 11bp for the 19 months between its June 2022 bond, which was trading Monday on a mid-spread of 120bp over Treasuries, or 156bp as a Z spread, and its 4.625% January 2024 bond, which was trading at 150bp over Treasuries and 167bp as a Z spread. 

For its latest market outing, Swire was not able to achieve an order book of the $3 billion magnitude it recorded in 2013. This is not that surprising considering the deal came a few days ahead of the US Federal Reserve's key interest rate decision. 

"This was a drive-by transaction with no prior marketing but Swire is very familiar to many investors. Such a modest new issue premium was a good outcome," a person familiar with the deal told FinanceAsia.

Sales desks reported little real money buying on Monday, with flows described as sporadic. Nevertheless the iTraxx Asia ex-Japan Index continued to tighten and was quoted at 133/136 at the New York open. 

One fixed-income analyst commented that recent widening in global investment grade spreads may reverse itself once the first rate hike is announced. This is based on recent pre-positioning by issuers (more supply) and a more conservative stance by investors (less buying).

Swire's own bonds are currently trading about 27bp wide of their tightest point this year in May/June and about 5bp tighter than their recent widest points in late August at the time of Shanghai's Black Monday and again at the very beginning of September when credit markets widened again on global growth fears.

Swire's credit metrics

According to S&P Capital IQ figures, debt to Ebitda is now on the high side relative to the past decade and stood at 4.2 times as of June 2015. This has been on a rising trend since the end of 2012 when the figure stood at 3.4 times. 

Before this, the previous peak came in 2010 at five times. 

The group's recent interim figures revealed that losses in the marine business were offset by higher profits from its aviation business.

Underlying profits (excluding the re-valuation of its investment properties) was HK$4.33 billion, up 12% year-on-year. Excluding non-recurrent items, the figure showed a more modest 1% improvement to HK$4.493 billion.

Net profits at the property arm were up 5% to HK$3.208 billion, while the aviation business via Cathay Pacific soared 198% o HK$1.063 billion. The beverage segment jumped 13% to HK$456 million, while the marine services business swung from a HK$658 million profit in June 2014 to a loss of HK$156 million in June 2015. 

This resulted in net gearing rising slightly from 22.4% to 22.8%. 

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