MTR Corporation, Hong Kong's mass transit operator, sold a debut subordinated perpetual bond to fortify its standalone rating ahead of large capital expenditures over the next decade.
The US$3bn trade was split evenly between 4.875% perpetual non-call 5.5-year and 5.625% perpetual non-call 10.5-year portions, both priced at par. Respective initial price guidance was the 5.375% area and 6.125% area.
The subordinated perps, with a coupon deferral option subject to a dividend stopper and pusher, will receive 50% equity treatment for the life of the bonds by Moody's and 50% until the first reset date by S&P.
The equity treatment will provide a buffer for MTR to maintain its Aa3/AA+ (Moody's/S&P) ratings, on par with the Hong Kong government, as it plans to spend HK$90.8bn (US$12bn) between 2025 and 2027 on new railway projects, existing railway maintenance, Hong Kong properties and investments in mainland China and overseas. Around HK$100bn of investments in new projects are scheduled over the next decade, according to local media reports.
MTR did not disclose the details of its funding plans but said during the deal roadshow on June 11 that it will be a regular issuer in the coming years.
While the subordinated perp will be "a key part of its capital structure", it does not plan to market a second deal with the same structure this year.
Investors piled into the rare trade from the high-quality credit, attracted by the yield pickup over MTR's senior bonds. With a peak order book of US$17.5bn and a final book of US$16bn, the issuer tightened pricing by 50bp for both tranches and upsized the deal from the original target of US$2bn.
"MTR's senior bonds are trading at a very tight level. It's a way for investors to go down the capital structure of a high-quality name to get that extra pickup," said a banker on the deal.
A second banker on the deal said the result was a "a vote of confidence" in MTR's credit and in Hong Kong in general.
"No one went into this thinking a US$3bn transaction at a good and attractive price was really our base case," he said.
The company's US$500m 4.375% 2030 and US$1bn 4.875% 2035 senior bonds were trading at 4.23% and 4.73% respectively. The perpetual non-call 5.5-year offered around 60bp of pickup and the non-call 10.5-year around 80bp, quite tight compared with the 100bp–150bp differential prevalent in the market, said the first banker. He said the differential can go as wide as 200bp.
"It paves the way for them to access the market in the future," said the second banker.
Quick return
It was the second deal from MTR in three months after it raised US$3bn from a triple-tranche senior bond in March. The majority government-owned statutory body initially planned to return later in the year, but with the rapidly changing developments on US tariffs, issuers have been reassessing their funding strategies.
The leads held calls on Sunday June 15 to discuss the timing. With the view that things could only get worse, they decided to launch the deal early the following day, said a third banker.
The deal was structured as dual-tranche, instead of the more common single tranche from perp issuers, to achieve size and help create price tension.
No investor fatigue was apparent, with a larger order book than the senior deal in March. Bankers said the perp, which is more attractive to fund managers, tapped into a different pocket of liquidity than a senior deal, which tends to have more support from banks. There was also "very noticeable support" from the Middle East thanks to extensive investor meetings held in May, said the third banker.
"It clearly shows those Asia investors really didn’t see geopolitics as a deterrent," said the second banker.
The leads did not estimate a new issue premium. CreditSights analysts wrote in a prepricing note that they recommended participating down to 4.8% for the perp non-call 5.5-year and 5.5% for the non-call 10.5-year. They expected investors would be comfortable with that given the company's "indispensable policy role and solid government backing".
Both tranches traded down at 99.50 on Friday, according to LSEG data.
Orders for the non-call 5.5-year reached US$7.3bn, including US$343m from the leads, from 325 accounts. Asia took 77%, EMEA 21% and the Americas 2%. Asset and fund managers accounted for 62%, banks 10%, insurance 8%, official institutions 4%, corporates 8% and private banks and family offices 8%.
Orders for the non-call 10.5-year reached US$8.7bn, including US$320m from the leads, from 380 accounts. Asia bought 71%, EMEA 28% and the Americas 1%. Asset and fund managers made up 65%, banks 7%, insurance 10%, private banks and family offices 10%, official institutions 4% and corporates 4%.
The Reg S notes, to be rated A2/A (Moody's/S&P), will be issued by MTR Corporation (CI) and guaranteed by MTR Corporation.
If not called, the coupons reset on the first reset date and every five years thereafter to the prevailing Treasury rate plus the initial spreads of plus 86bp and 120.7bp and the applicable step-up.
There is a 25bp step-up for the non-call 5.5-year from year 10.5 and an additional 75bp step-up from year 25.5.
For the non-call 10.5-year, there is a 25bp step-up from year 10.5 and an additional 75bp from year 30.5.
Credit Agricole, HSBC, JP Morgan, Societe Generale and UBS were joint global coordinators, as well as lead managers and bookrunners with ANZ, Bank of China (Hong Kong), Barclays, DBS Bank, Deutsche Bank, Mizuho and Standard Chartered.
Proceeds will be used for general corporate purposes.
Additional reporting by Morgan Davis