Hong Kong’s second largest broadband operator, Hong Kong Broadband Network (HKBN), plans to embark on an initial public offering (IPO) in the next two years in order to boost its presence and establish its name once again in the public domain.
“Our plan is to do an IPO. The strategy now is to help grow the company. We want to paint a picture that we can achieve very consistent growth [after our leverage buyout] – in terms of meeting all our KPIs (key performance index) – so that we can get a good valuation in the next two years,” said Patrick Leung, financial controller of HKBN to Asiamoney PLUS in an interview on February 6.
The Asia Pacific arm of global buyout major CVC Capital Partners, Metropolitan Light, bought HKBN from the telecommunications giant City Telecom for around HKD5 billion (US$644 million) in mid 2012, taking the firm private and embarking on several restructuring activities to boost the company’s future profitability.
One of the many changes that were made was to restructure HKBN’s debt, which was plagued by various loan covenants that the company had to bear after having separated from its parent.
“Upon completion of the LBO, we were partially financed by a whole bunch of bank facilities from 12 banks. After that we had to manage a lot of covenants. That was a real headache,” said Leung. “There were a lot of covenants which we have to measure and make sure that we comply with that on a quarterly basis. The covenants will govern a lot of debt-service ratios and even capex [capital expenditure].”
In order to reduce the impact of covenants on its balance sheet, HKBN opted to issue a high yield bond last month.
In January, HKBN made its debut in the US dollar bond market by launching an unrated five-year non-call two US$450 million Reg S deal, which held up in secondary trading. The coupon offered was 5.25%.
While the bond’s yield is comparable to how much the HKBN would pay for a US dollar bank loan, the fact that debt instruments possess covenant-light structures increased the products’ appeal to the company.
For example, the operator had to pay an average of Hibor+4.5% for its bank loans. But given that the debt was primarily denominated in US dollars, it still had to add additional hedging costs to minimise foreign exchange (FX) risks. This increased the average total cost of servicing loans to around 5%, shares Leung.
“The bond is different from the covenant-heavy loans that we have in the existing facilities and we prepared to kick-off the project immediately. The proceeds of the bond were used to pay back bank facilities and now we have more freedom to expand into other areas,” said Leung.
The company is the second largest broadband operator in Hong Kong. It owns and operates a fibre network that passes around two million homes and 1,700 commercial buildings in Hong Kong.
The only issue that the company needs to address in the coming months is the currency mismatch that is present on its balance sheet. Almost 100% of its revenue is denominated in Hong Kong dollars, but it still has exposure to US dollar-denominated interest payments and renminbi-denominated operational costs as 50% of its staff resides in Guangzhou.
As a result, HKBN is looking into hedging these exposures.
“Opportunities do arise between the Hong Kong and US dollar even though these two currencies are pegged. You can have very attractive forward rates. It’s surprising that the forward rate can be less than 7.75 for a one-year hedge sometimes,” said Leung. “The renminbi has also been appreciating against the Hong Kong dollar and from time-to-time we need to pay salaries and rent which implies that our costs are increasing. Right now we are studying different hedging options and hopefully it will release a little bit pressure.”
“We have been running a very efficient operation in Guangzhou where over time we believe that we can improve efficiency by having a slightly smaller workforce with more automation so that our running costs will be growing at a very small rate every year vis-à-vis our rising revenues,” he added.
HKBN – which does not aim to issue any more bonds in the next few months – plans to spend HKD200 million to expand its wi-fi coverage across the city to 15,000 hot spots over the next 18 months. This will be self-financed, highlights Leung.
The company has successfully secured two out of the three contracts with top mobile operators which include Smartone, CSL and China Mobile, he adds.
“It’s actually doesn’t make sense for these operators to rely on the back of PCCW and Hutchison, but for some reason that have signed long-term contracts with these providers,” said Leung. “We feel that we can secure contracts in this area and will be one of the key growth drivers for us."