WTT: PE sponsors dial in bond markets to refinance debt

A high yield bond for WTT demonstrates how private equity sponsors are increasingly turning to the bond markets to optimise an acquisition's capital structure.

The private equity industry’s growing presence within Asia’s bond markets was underlined once again this week following the pricing of a $670 million high yield bond issue for WTT Hong Kong, the Territory’s second largest fixed line operator, owned by MBK Partners and TPG Capital.

Private equity groups have now executed a handful of bond deals in the region and their growing enthusiasm for the sector should prove to be a win-win situation for all concerned.

Debt capital markets bankers are happy because they are gaining a new source of business alongside the sovereigns, quasi-sovereigns and corporates, which have long dominated Asia’s G3 bond markets.

Investors are also likely to take comfort from private-equity backed deals since their low ratings and high leverage belies much higher governance standards and financial sophistication than fund managers are used to at the bottom end of the Asian credit spectrum.

And for the private equity industry itself, the bond market offers another avenue to optimise their acquisitions’ balance sheets.

WTT’s deal differs from recent deals for the likes of Hexaware and MphasiS in India and PT Paiton Energy in Indonesia, which were all structured to increase debt so sponsors could withdraw equity through dividend re-capitalization.

In this case, the bond market has been used to re-finance costly bank debt that funded the $1.2 billion WTT acquisition in November 2016.

Bankers declined to say how much money MBK and TPG have shaved off their debt costs, but the figure is likely to be substantial based on the 11% coupon attached to the HK$814 million ($104.26 million) mezzanine loan, which is being taken out by the bond deal.

The two private equity groups, which each hold 50% of WTT, are also using proceeds to re-pay a HK$4.2 billion senior term loan. The group also has an outstanding HK$405 million revolving facility. 

Pricing for the new five- non-call three-year bond deal was fixed this Tuesday at par on a coupon of 5.5%. The deal had initially been marketed around the 5.875% mark.

It came against a weak backdrop. The high yield markets have not been strong in recent days, with fund managers wary of new deals and keen to protect returns, as they get ever closer to year-end.

Indonesia’s Sawit Sumbermas postponed a $300 million deal on Tuesday, for example.

Strong response

But WTT attracted a very strong response, with the order book topping out at $3.4 billion and closing at $3.3 billion with 140 accounts. Distribution statistics show that 76% of the Reg S/144a transaction went to Asia, with 13% to EMEA and 11% to the US. By investor type, fund managers took 88%, banks 8% and pension funds 4%.

Investors’ enthusiastic response was not that surprising given the B1/BB- rated deal (Moody’s/Fitch) has considerable rarity value both in terms of sector (telecoms rather than the never ending stream of property companies) and geography (Hong Kong proper rather than China).

Specialists also said the structure had more appeal for investors than both Hexaware and MphasiS because WTT is an unlisted entity. The deal was issued in the name of Cayman-registered WTT Investments, with a guarantee by WTT Development, WTT Cayman Corp and WTT HK Ltd.

“WTT was able to bring its assets into the guarantor group,” said one observer. “The two Indian companies weren’t able to do this because they’re both listed entities and the regulations don’t allow it.”

In terms of pricing comparables, bankers cited a number of benchmarks.

These included other Hong Kong-based high yield issuers such as unrated property developer Lai Sun. It has a 4.6% September 2022 bond trading around the mid 4% level.

Within the telecoms sector, bankers also flagged Hexaware’s deal, issued in the name of HT Global. The Ba3/BB-/BB- rated 7% 2021 (callable 2018) notes are currently trading around 5.3% on a yield-to-worst basis.

Further afield, the UK’s TalkTalk has a similar BB- rated 5.375% January 2022 deal (callable 2019) trading around the 5.328% level on a yield-to-worst basis.

WTT received a good primary market reception and also held its own in the secondary despite soft markets around it. By the end of the Asian trading day on Wednesday, it was being quoted at 100.5 to yield 5.38%, or 12bp tighter than its reoffer price, according to market data.

In their ratings assessments, both Moody’s and Fitch highlighted WTT’s elevated leverage. According to its online roadshow, the group recorded net debt to Ebitda of 5.6 times pre-deal and 5.8 times pro-forma after it.

Fitch said it believes the company will be able to reduce this to 4.8 times by 2020 because of its ability to generate pre-dividend free cash flow margins of around 10% (HK$200 million to HK$250million).

However, key will be the attitude of the two sponsors to their equity. In the deal’s online roadshow, they re-iterated their intention to de-leverage the company’s balance sheet over the near to medium-term.

They said they intended to do this by accumulating excess cash and structuring dividend payments to support their de-leveraging objectives.

Moody’s warned it will consider lowering the ratio should this strategy change and debt to Ebitda spikes above 5.5 to six times.

At the end of 2016, WTT had a 16% market share in the city’s business voice, broadband and IT services, compared with 60% held by HKT Trust, a Richard Li-owned company.

Joint global coordinators for the bond issue were Citi, HSBC and Standard Chartered, with Huatai Financial Hong Kong and Nomura as joint bookrunners.

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