Wednesday, 24 October 2018

DCM 2006 - Cash pile

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Hutchison Whampoa’s absence from the capital markets of late is testing the patience of bankers. But with a cash-pile and 3G becoming earnings accretive, it can afford to wait. Hutch has been Asia’s most prolific borrower in the offshore capital markets over the past few years. Its ambitious foray into 3G telephony required significant capital expenditure and despite some mishaps it has emerged as one of Asia’s savviest issuers. Jonathan Rogers reports.

Hutch has not tapped the bond market since its successful €1bn 10-year offering last June. This is largely explained by its US$18bn cash pile, but the company's opportunistic nature means a quick-fire deal is possible at any time.

Over the past five years, Hutch has run the gamut of investor perceptions since forging ahead with its 3G investment. Analysts predicted the project would fail, causing around US$10bn of write-offs, as well as a consequent ratings downgrade which would drag it into Triple B territory (Moody’s and S&P had it on a A3/A rating with a negative outlook in July 2001).

Certainly the company’s leverage shot up because of the 3G investment; the €1.3bn acquisition of Kruidvat, Europe’s number three pharmacy chain, also put a strain on its ratios. As a result Hutch bond spreads widened during 2002, with its then benchmark 7% 2011s widening to 204bp over Treasuries from160bp at the beginning of the year for the worst performance in the Asian investment-grade arena over the period.

Unsurprisingly, with secondary market pessimism pushing the Hutch curve to that extent, it was not the most auspicious time to bring new deals and the borrower found itself paying the price in 2002 when it was forced to pull a two-tranche sterling and euro deal.

The euro tranche of the planned deal was to have funded Hutch’s purchase of Kruidvat, with the sterling tranche matching its UK port assets. In the end, a poor investor response caused the deals to be cancelled, with the funding provided instead by the syndicated loan market.

But the success of the €760m (US$760m) loan facility helped restore the company’s profile as one of Hong Kong’s most sophisticated borrowers, with pricing levels around 80bp inside secondary cash and 166bp inside CDS.

Indeed the dynamics on a US$1bn tap of its due 2013 bond in 2003 emphasised just how high bankers have jumped when Hutch asks them to. At US$2.5bn, the tap created the largest bond issued by a corporate from non-Japan Asia and was hard-underwritten by Goldman Sachs at 255bp over Treasuries, printing at that level, some 5bp inside the original issue priced just two months earlier.

The lucrative nature of the account explains the strategy, with Goldman having earned US$30m in fees for arranging straight and convertible bonds for Hutch since 1997. Indeed since1994 the company and its subsidiaries have paid out over US$170m in fees on debt transactions, according to Thomson Financial.

Although Hutch had to pay a spread more in line with a Triple B issuer on the tap, only a handful of Asian corporates could have got a deal of that size away during a period of intense volatility in regional credit markets as a result of SARs and rising tensions with North Korea.

This ability was a crucial advantage, given that some 60% of Hutch’s US$20bn of outstanding debt was scheduled to mature between 2003 and this year. A further tap at a spread of 230bp over Treasuries took the issue size to US$3.5bn, with all this nimble work being done in the space of just three months.

This was topped in remarkable style a few months later when Hutch issued Asia ex-Japan’s biggest bond: a US$5bn three-tranche global. It sold US$1.5bn of seven-year bonds, US$2bn of 10-year bonds and US$1.5bn of 30-year paper, creating in a single shot a pretty full yield curve. The US$9.6bn raised by Hutch in 2003 accounted for close to 30% of the G3 supply brought that year.

Having filled a substantial portion of its funding need Hutch absented itself from the offshore markets for around 18 months and then returned with one of the most successful G3 investment-grade deals of 2005. ABN AMRO, Deutsche Bank and HSBC assembled a €5.5bn book hours after the mandate was awarded, allowing accelerated execution of the €1bn issue at mid-euro swaps plus 95bp, some 2bp inside guidance.

The 37.5bp fee paid on the deal might seem excessive in the light of the single digit fees issuers such as the Philippines have got used to paying, but the relatively high level is explained by Hutch’s insistence on bought or back-stopped deals and is the quid pro quo for the risk. Indeed that fee level represents the average fees Hutch paid on a blended basis via its five deals in 2003.

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