Hutchison Whampoa: The other KS
Hutchison Whampoa has scored an impressive number of firsts with the four benchmark bond issues it's launched so this year. Its $3.5 billion bond issue due February 2013 now stands as the largest bond issue in Asian history, while its two $1 billion re-openings of April and May are the largest of their kind from Asia. Most recently its Eu1 billion 10-year bond of early July became the region's largest euro-denominated deal. Here Group Treasurer KS Chan discusses the conglomerate's achievements.
Going back to September 2002, you tried to do a euro-denominated issue, which didn't work. What went wrong?
Chan: Unfortunately, markets suddenly collapsed during roadshows and virtually any borrower lining up to do a deal had to pull it. We did likewise and it was quite an unhappy and unfortunate experience. After that we said no more fundraising for 2002. Then towards the end of last year, beginning of this year, markets started to improve again and we started getting some interesting proposals from banks.
The $1.5 billion deal we did in February via Merrill Lynch was very important because, among other things, it closed a chapter for us. We were also originally only intending to raise $1 billion, but increased the deal because demand was so strong. We were also able to place the issue within a very short time frame and without a roadshow, thereby limiting exposure to market risk, which was a first and key objective for us.
Then you did a $1 billion re-opening in April.
After the Merrill deal a lot of other banks, which had missed the first deal, started sending us even more proposals. At the same time markets continued to improve and we thought it made sense to take advantage of lower interest rates by re-opening the February deal for another $1 billion. That was another good trade for us and very well executed by Goldman Sachs.
After this there was another $1 billion re-opening in May.
HSBC came to us and said would you like to re-open the trade? They showed us very attractive pricing and assure us we could price at an even lower spread than the last deal. The outstanding 2013's had performed very well in the secondary market and base rates had also declined sharply since that deal, so we decided to go for it.
So of the three dollar deals, which did you like best?
We like all three but the first one was the greatest relief because it was four times oversubscribed and proved to any doubters that the only reason the September euro deal had failed was because of unprecedented rapid change of market conditions at the time, not because investors had any issues with Hutch.
But you ended up paying such a lot of money in fees.
We paid fees for hedging, advisory and structuring services and other expenses. I believe investors would not have been concerned about it. They're looking at Treasury rates and credit spreads.
Your most recent transaction has been in euros. Why did you come back now?
We first entered the euro market in 1999 with an Eu500 million seven-year deal via Deutsche Bank and HSBC. After that, market and the currency weakness put us off going back. But this year we saw demand coming back and attractive pricing. And for us, the deal is important because it diversifies our investor base and gets our credit in front of European investors.
It put to rest any notion that Hutch credit is less attractive to European than Asian or US investors and, for the fourth time this year, priced well through the pricing of our last issue.
Why did you go with HSBC as lead manager?
Quite a few banks were giving us proposals up to Eu1 billion, but we liked the HSBC proposal - particularly the timing, tenor, strategy and fact that we wouldn't need a roadshow. You'll notice that we've really shortened the timetable on all our deals this year to avoid execution risk should markets suddenly turn volatile.
Other banks were advising us to wait for a week to let the huge GM/GMAC deal be absorbed by the market, whereas HSBC said that in a quiet issuance week we would really be able to draw attention to our credit. Some also said that because there was a public holiday in Hong Kong on the Tuesday and the US on the Friday, we should wait another week, while HSBC said the holidays were not of material significance to the deal. The window is there so go for it.
HSBC was not as heavily involved in the GM/GMAC deal and therefore was able to provide greater focus in this transaction than other banks, which played a much bigger role and were probably a bit hesitant. Maybe they wanted to let the GM/GMAC deal settle down before bringing out another benchmark credit.
A lot of people seem to think that HSBC still has a lot of the euro deal sitting on its books.
HSBC had an order book close to Eu1.2 billion. We had been receiving proposals for Eu1 billion from several other banks, which were equally confident about demand for our credit for several weeks leading up to the transaction. And also if you remember there had been lots and lots of rumours about us doing a euro deal, so it had been very well flagged and soft marketed by a lot of competing banks. Spreads of the Euro bond have been steady to slightly tighter in the after market. In my opinion, all of this speaks for itself.
What's your general policy when it comes to giving out mandates?
These days we have been asked whether we only give mandates to banks, which lend us money. A few years ago, we were always asked whether Goldman Sachs was our appointed manager because they seemed to do all our trades. I give the same answer to both questions. We work for our shareholders, not for investment banks. We don't just look at pricing, but also structure, how to approach the market, timing, all sorts of different variables.
Will you be back in the markets again this year?
That's a question raised by investors. At the moment we don't have any more plans to issue again this year. But we would never say never and will continue to monitor the market on an opportunistic basis.
What's your current position in cash and near cash equivalents?
The liquidity cushion will remain pretty stable around the $20 billion mark. We have $3 billion coming due from an exchangeable in September and then another $2.6 billion in January, which we will re-pay. After that, the next major maturity is a $500 million eurobond in 2006. Once the two exchangeables are re-paid, the average maturity of our debt will lengthen out considerably. It's a little skewed at the moment by these two redemptions.
Will gearing continue to rise?
Net debt to net total capital should peak in 2004/2005 because of drawdowns on our 3G loans in the UK and Italy. After we're fully drawn down, it should start to decline again. Over this time period, we'll move from a net debt to net total capital level in the high teens to the mid 20's and then back down again. If you look at our business other than 3G, I expect gearing to remain very conservative, with net debt to net total capital at or below the 10% range.
What do you think of your current spread levels?
There is always room for improvement and we're certainly not satisfied with our current spread levels. We are trading at around 200bp over Treasuries when comparable credits of the same rating are trading closer to 100bp over.
A lot of this has been attributed to the S&P downgrade. Do you think it was justified?
S&P didn't offer any new reasons for their decision to downgrade us from A to A-. They continued to say they were happy with our liquidity profile and growth prospects etc. It came down to 3G, but that story has been out there for over a year already.
But some of the hard data is coming in now that the service has been launched.
The data we've seen is too early to be significant from a rating point of view, although with the launch of full summer marketing campaigns in the UK and Italy, I must say the outlook is very encouraging. We argued that now is not the right time to make a new ratings call. They obviously didn't agree, which was disappointing.
So where do you stand now?
Our general strategy is to continue maintaining a high liquidity cushion on our balance sheet supported by a healthy, long maturity profile and an overall conservative level of gearing. With the recent series of fundraisings behind us, we have for the medium term the luxury of deciding whether to take a more opportunistic view of coming back again.