Hong Kong & China Gas, better known as Towngas, set Asia’s offshore debt markets on fire in July last year with a well-priced, trail-blazing $1 billion debut bond, even as issues from other established companies languished in the pipeline.
The A1/A+ rated deal was the largest investment-grade corporate dollar bond from ex-Japan Asia since 2003. It was also the first Asian G3 primary market bond in a month, just as the global financial system began its catastrophic slide.
After embarking on an extensive roadshow in Hong Kong, Singapore, Los Angeles, Boston and London, the issuer received some reverse enquiry orders for a 30-year deal, but plumped for a cheaper 10-year issue. In the week after the roadshow, lead managers HSBC and Morgan Stanley provided cautious pricing whispers in the mid-200 basis points range over US Treasuries. In a deal that took eight hours to execute, Towngas priced a $1 billion, 10-year bond at 237.5bp over US Treasuries, at the tight end of official price guidance on July 31.
But on the day of pricing, fears over the solvency of western banks exploded as the US Federal Reserve moved to extend liquidity facilities to investment banks. At the same time, equity markets had begun their downward spiral as confidence in the global financial and economic climate plummeted. The dysfunction in credit markets deterred other regular Asian issuers – including the likes of Korea’s Posco Engineering & Construction and Singapore’s Stats ChipPac – from coming to the market.
Against the Grain
Towngas bucked the trend. “The consensus from the lead managers and the borrower was that the market was unlikely to improve post summer, and so the issuer took the bold step to come to market in the traditionally quieter month of July,” says Sean Henderson, head of debt syndicate at HSBC in Hong Kong.
“This meant the deal secured outstanding pricing and execution before they effectively shut down until the end of 2008.” The issue notched up $2.2 billion of orders with 142 accounts snapping up the paper. By geography, Asia bought 54%, the US 32% and Europe 13%. Asset managers ordered 49%, private banks 11%, banks 6%, insurers 32% and others 2%.
Some bankers say the deal offered a slight pick-up on the secondary trading levels of other comparable issuers, including Swire Pacific’s 2018 bond, which was trading at 225bp over US Treasuries as the Towngas deal was priced. Swire, however, is rated two notches below, at A-, reflecting the premium the higher rated utility had to pay for its debut issue.
Comparisons
But bankers on the deal say the wide secondary spreads of other comparable European and Asian electricity providers ensured the deal was competitive. For example, outstanding five-year paper from Korea Midland Power, which is rated A-, stood at 270bp over US Treasuries. “The deal printed well inside the majority of Asian comparables, which is not surprising given the rating, but also printed without any new issue premium to some of the best-known A-rated European utilities in US dollars at the time,” says Henderson. “This was a significant achievement given this was a debut offering of significant size from Asia.”
“The deal’s success lies in its scarcity value and the fact that it was the right name at the right price for the right sector at the right time,” says Vinay Jayaram, co-head of fixed income capital markets for Asia at Morgan Stanley.
The issuer upsized the planned $500 million to $750 million benchmark to $1 billion, comforted by the decent pricing levels and after investors voiced preference for a larger deal to boost trading liquidity. Henderson says this decision to boost the company’s cash in hand proved useful given the hike in borrowing costs from alternative sources. “The proactive financing of long-term assets with long-term debt was wise, particularly given the already declining liquidity in the bank markets at the time.”
Towngas, a 145-year-old utility company, is a de facto monopoly and so benefits from predictable profitability and cashflows. It services 65% of the Hong Kong market, with 1.67 million customers, and has been actively expanding in mainland China in piped city-gas projects and new energy developments. Profit after tax in 2008 stood at HK$4.39 billion. Proceeds from the deal will be used to refinance existing debt and fund new capital projects.
The deal highlighted how primary markets were open for high-rated credits willing to pay the premium – a fact that holds true today. The swift and substantial book-building process was buoyed by real money orders for the transaction: the utility company is seen as a defensive credit in the global downturn.