Issuer of the Year
Turbulent markets derailed the ambitions of many issuers this year, but one stood out for its achievements across both the debt and equity capital markets. For embracing new products and incredible market timing, Cheung Kong (Holdings) is IFR Asia’s Issuer of the Year.
Hong Kong property conglomerate Cheung Kong (Holdings) and chairman Li Ka-shing are known locally as the most astute of investors. Aside from its phenomenal property portfolio in Hong Kong, where it has developed one in every seven private residences, its track record of strategic investments is second to none. From humble beginnings as a plastics manufacturer, the group has acquired assets ranging from telecoms and power plants to life sciences, and now controls Hong Kong-listed entities with a market capitalisation of HK$785bn (US$101bn) at the end of October.
Cheung Kong, the group’s flagship, brought its characteristic clout and dexterity to the capital markets in 2011, taking advantage of favourable conditions with a number of well-timed and adventurous deals in both debt and equity – as well as somewhere in between.
Its fundraisings over the past 12 months reflected the dominant themes of the year. Whether it was selling the first renminbi-denominated shares in Hong Kong, a rare bond issue in Singapore dollars, or a ground-breaking perpetual hybrid, Cheung Kong was consistently ahead of the curve.
The holding company is a rare issuer in the debt capital markets, as it typically prefers to fund its capital expenditure and acquisitions through operating subsidiaries, such as Cheung Kong Infrastructure or its real-estate investment trusts. According to Thomson Reuters data, the holding company had debt outstanding of just US$341m at the beginning of November 2010, versus its earnings for that year of US$3.4bn and market cap of US$27.0bn.
Since then, however, it has boosted its presence in the bond markets, raising over US$1.1bn in Singapore dollars in a move that underlined its foresight and its ability to react quickly to changing market conditions.
Cheung Kong, having raised S$225m (US$175.5m) in a five-year deal in November 2010, was quick to spot another window of opportunity as ultra-low benchmark rates in Singapore began to offer an advantage over the traditionally deeper Hong Kong market. Cheung Kong placed a S$500m dual-tranche issue in July of five- and seven-year bonds at 2.585% and 3.408%, respectively. This unleashed a wave of similar deals in quick succession from Hong Kong peers Wharf Holdings, Wheelock Properties and Henderson Land.
Significantly, the Cheung Kong deal also served as a precursor to its landmark S$500m senior perpetual in September. Cheung Kong’s was Asia’s first senior perpetual, and the first hybrid in Singapore from an overseas issuer.
Meeting criteria
Subsidiary CKI had started the ball rolling for Asia’s corporate hybrid market with a US$1bn benchmark in September 2010, but the parent company took a different tack a year later. The S$500m perpetual bond showcased both the growing depth of Singapore’s local investor base and the ability of Asia’s local debt markets to withstand some intense global volatility. It also cashed in on an increased flow of foreign capital into Triple A rated Singapore in the weeks that followed Standard & Poor’s downgrade of the sovereign credit rating of the US.
Previous perps from Asia, including those in US dollars, had all been subordinated, meeting the criteria for partial equity treatment that credit rating agencies had set. Cheung Kong decided to test a senior structure – a first in Asia – that would allow it to get full equity credit under IFRS rules, prioritising accounting treatment over any impact on its credit rating. Cheung Kong has an unsolicited A– rating from S&P. At the same time, it offered investors a higher level of credit comfort since the bonds were not subordinated.
The senior bonds came without many of the investor-friendly elements used in other perpetuals, making it more attractive to the issuer. There was no coupon step-up and no restrictive covenants, as well as no mandatory coupon deferral. The notes are callable at par any time after five years. DBS Bank and JP Morgan were joint bookrunners.
“Our gearing is low, so it didn’t matter to us whether it was senior or subordinated. We went with the senior structure believing investors would be a little more comfortable and that would result in a lower coupon,” said Edmond Ip, deputy managing director of Cheung Kong.
“5.125% forever is a reasonably attractive cost of equity funding,” he said.
The books were opened and closed on September 1, with orders reaching S$718m, but Cheung Kong kept the deal size at S$500m to ensure positive aftermarket performance. The bonds rallied to 100.4/100.5 the following day.
The deal achieved a far lower cost of funds for Cheung Kong than was on offer in the US dollar market, where investors would have demanded a yield in the mid-7% range.
Interest in the perpetuals was so strong that Cheung Kong was able to re-open the issue for a S$230m tap at 100.125 on October 19, generating a book of S$300m. The bonds rallied in secondary trade to 100.50/101.00 the following day.
It was the first Hong Kong issuer to take advantage of the growing sophistication of the Singapore debt market. Singapore has long held a reputation for being conservative – boring, even – but issuers like Cheung Kong are helping to develop the city’s bond market into a vibrant arena with a true liquid yield curve.
Cheung Kong’s role in developing the equity capital markets was every bit as impressive.
The landmark listing of its Hui Xian REIT was the first renminbi-denominated IPO outside of mainland China, paving the way for the development of an offshore renminbi equity market in Hong Kong.
Hui Xian’s Rmb10.48bn (US$1.6bn) IPO came at extremely aggressive terms, capturing investors’ unbridled enthusiasm for renminbi exposure in the first part of 2011. The company paid a yield of 4.26% for 2011, based on its profit forecast, far lower than the returns offered on any of the city’s local real estate investment trusts – including Cheung Kong’s own Fortune REIT and Prosperity REIT.
“Timing is everything. If we had delayed just another couple of months we may not have been able to finish the deal,” said Ip. “There was a lot of work to do, and it needed a certain degree of luck.”
Hui Xian priced its offer of 2bn units at the bottom of the guidance range of Rmb5.24−Rmb5.58. The deal generated a decent level of interest from institutional investors, with the institutional book multiple times covered. The retail response, however, fell short of expectations with that tranche only 2.19 times subscribed.
The main reason for a worse-than-expected response to the retail tranche was Hui Xian’s offer of 20% of the float to retail investors, instead of the standard 10%, as per Securities Futures and Commission requirements. The Hong Kong’s securities market watchdog was worried that Hui Xian would not set aside enough shares to retail investors, who it expected would rush to the city’s first renminbi-denominated IPO.
More expensive than usual
Margin financing on Hui Xian’s IPO was also more expensive than usual, with brokers charging annualised interest rates of around 2%, compared with the usual less than 1%. This was done to compensate for the additional cost of swapping Hong Kong dollars to renminbi. Some brokerages charged as much as 2.8% for margin financing against 1.0%–2.0% for Hong Kong dollar issues.
Although investors were left unimpressed as the units slipped well below their issue price, Cheung Kong’s experience set a benchmark for future renminbi share sales. Its listing also prompted the exchange to introduce rules to deepen secondary market liquidity and clarify trading arrangements for renminbi-denominated shares.
“As a group, Cheung Kong likes to be first – and it did exactly that. The only thing it was guilty of was coming too early,” said one banker close to the company. BOC International, Citic Securities and HSBC led the transaction.
Hui Xian’s market-opening listing has already prompted other issuers to follow. Ascendas China Commercial REIT, a spin-off from Singapore property developer Ascendas Group, features Shanghai commercial property assets. It is looking to raise US$300m–$400m through a renminbi REIT listing in Hong Kong.
