Hutchison Whampoa - Risk management

  • 12 Sep 2003
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Richard Morrow interviews Hutchison Whampoa's group treasurer KS Chan and finds out exactly what the company thinks about Standard & Poor's controversial downgrade in June, how it dealt with Sars, how 3G is progressing and what its funding plans are for the coming year.

What was your funding programme this year and how close are you to achieving it?
We have a very liquid cash position this year, with liquid reserves staying stable at $20bn. As a result, we have not had any funding requirement per se.

Instead, we decided to come to market this year in response to good market movements and very strong reverse enquiries.

At the beginning of this year interest rates were falling and several banks advised us that investors wanted us to return. As a result we decided to return with the first $1.5bn 2013 deal, and with each subsequent bond the funding base rate improved, which offered us extraordinarily good funding costs.

Following this we were able to launch two more tranches of 10 year global bonds and the Eu1bn issue in July. Each respective dollar bond was priced at a spread and base rate that improved on the levels of the issue beforehand, while the euro issue was priced to provide a spread inside the last dollar bonds.

We had always maintained that the proceeds of the issues would be used to repay the $5.65bn in exchangeable bonds maturing in September and January 2004, and maintain our very high liquidity level.

How much has market volatility and the background economic environment (including the effects of Sars) affected your funding strategy this year?
We were responding to a significant surge in demand in the market earlier this year, which basically drove what we have characterised as very strong reverse enquiry.

It was an extraordinary market which generated an extraordinary level of demand. We listened to that demand and when the price was attractive enough, we said yes and went for it.

Sars had a fairly minor and short term effect on our spreads, but the impact of Sars did reconfirm a decision that we had already made, which was to minimise our exposure to the market each time we launched a new deal.

The markets had turned against us badly while we were roadshowing a euro issue last September, forcing us and several other highly rated borrowers to cancel their bonds. As a result of this, we have become averse to needlessly exposing ourselves to market conditions and have avoided conducting roadshows.

Sars became a global concern before the launch of our third dollar tranche. At that time investors would have been unlikely to want to talk to us directly anyway, because it would have been residents of Hong Kong who would have been conducting the roadshow!

What markets have offered you the most attractive funding?
When you talk about markets which provide attractive funding, you must consider them in terms of pricing, size and tenors achievable. Europe and especially the US offer the latter two areas.

The US market has provided us with 30 year funding in the past, while the euro market has also improved.

Our inaugural euro deal was for Eu500m in 1999 but this year we were able to price the Eu1bn bond without any difficulty.

But the Hong Kong dollar market offers us the most competitive levels in pricing terms, which is one reason why we arranged a HK$3.8bn syndicated loan this year.

In the bond markets, Hutchison has borrowed money in Australian dollars, US dollars and euros this year. As I mentioned, the dollar and euro issues offered us very attractive funding levels.

We decided to price an A$800m five year floating rate note in March because our Australian telecoms unit needed funds. At the time the Australian dollar was very strong and many banks had a lot of Australian dollars on their books because of private bank deposits. When HSBC said to us that we could get very good funding levels through an Australian dollar bond, we went ahead.

Why did you focus your funding strategy on the dollar bond and euro bond markets?
When you consider Hutchison's business, it has been expanding in Europe through both telecoms, ports and through the [Dutch retail] Kruidvat chain, so raising funding in euros is a natural correlation. About 39% of Hutchison's total assets were European at the end of 2002, while the currency accounted for 11% of our Ebit.

Going forward, there may well be a tendency for us to look more closely at the euro market than we used to when planning our funding programme.

Hutchison also has a lot of dollars on its balance sheet, so funding in dollars is also a natural choice.

One overriding factor that we examine when considering where and how to raise new funding is the potential assets links and our cashflow. For example, we have no significant assets that use yen, so if we were to consider issuing in yen we would probably need to swap it to dollars.

This would mean that we have to look at the bottom line cost of doing the funding, which would include the swap, credit and liquidity charges of raising funding in such a manner, and seeing whether this is still more advantageous than other currencies.

Were you pleased with the market reception to your Eu1bn 10 year issue in July? Do you intend to issue more euro denominated bonds in the future?
We were delighted with the euro deal.

The euro had dropped in value and demand had dried out after our debut in 1999, but this year the currency value returned while the interest rate environment offered us very attractive pricing.

For Hutchison the deal is important because it diversified our investor base and helped put our credit in front of investors. German investors bought most of the original bond, but this deal gained demand from French and Mediterranean investors as well as German accounts.

The issue was also important for us to put behind us any notion that Hutchison is less attractive to European investors than US or Asian accounts. The new deal was priced through our last dollar deal, which just showed the level of demand from European investors.

How have you chosen the bookrunners for each of your benchmark issues this year?
We looked at many factors when deciding which banks will lead manage our bonds. The areas we took into consideration include pricing, timing, the deal structure, the strategy of approaching the market and whether the issue required a roadshow.

For example, we mandated Merrill Lynch for the initial $1bn 2013 bond after the bank suggested something that nobody else had, which was to do a deal in less than 24 hours with no roadshow, which could still get good pricing.

At that time the experiences of the market turning so much during the roadshow of the postponed euro bond issue the previous September still haunted us.

Therefore, the ability to launch a bond without exposing ourselves to the volatility was a real eye-opener.

Despite one market rumour at the time, we did not close the door on raising more dollars after the first re-opening of the dollar bond in March. We would not close the door to more funding opportunities.

We have a policy that whenever we are asked whether or not we will arrange more funding we answer "never say never", but do not promise anything.

What is your opinion on the decision made by Standard & Poor's to downgrade Hutchison Whampoa's foreign currency rating from A to A- in June? Did the downgrade affect your funding strategy in any way?
From our perspective, the agency had no new reasons to downgrade us at that time. It had appeared satisfied with the previous nine months of our performance and the 3G investments had been well publicised for a year beforehand.

Plus we were about to launch our campaigns for 3 [Hutchison's 3G mobile system brand], so we asked why Standard & Poor's did not wait to see how the campaign and promotion scheme fared, but it decided to proceed with the downgrade.

However, despite the downgrade our spreads continued to tighten and we subsequently launched the third tranche of the 2013 bond and the euro bond, so it seems fairly clear that investors did not pay much attention to the downgrade.

Hutchison Whampoa's dollar bonds have been trading at a sizeable premium to those of several similarly rated conglomerates and European telecoms companies. Is this justified?
This premium is always in our mind when we do a new issue, and the benchmark that we set for ourselves is that we need to minimise this spread difference with each bond, and avoid doing deals that would deteriorate our spreads.

Realistically, however, our spreads are wider because of our 3G commitments. A lot of investors lost money due to the bursting of the telecoms and technology bubble, and they are cautious about the sector as a result.

Our spread disparity will probably change once 3G is fully delivered and performs well. We are confident that it will provide a fairly substantial return for the group as a whole, which is why we have invested in it.

So far the signs are looking quite favourable, as our interim results showed that we have gained over 500,000 subscribers to the service. As a result, equity investors seem to be getting more confident with Hutchison.

Our shares underperformed the Hang Seng Index before our interim results were published in August, but since then we have outperformed the index.

Given Hutchison's large reserves, do you plan to raise any new funding to either pay down future redemptions or meet capital expenditure requirements in the coming year?
The only major redemptions we have falling due are the $3bn exchangeable deal that matures this month and the $2.65bn exchangeable in January 2004, which we will cover with the proceeds from our dollar and euro issues this year and from our cash reserves. Given our very high liquidity level, Hutchison has no pressing funding needs.

Apart from that we have no meaningful redemptions either this year or next year, and the ones we have we can either roll over or pay down from our cash reserves.

We do not have any major capital expenditure requirements either. Most our needs are related to 3G, but we have not yet fully drawn down the Eu5.2bn and £3.2bn facilities that are covering our respective Italian and UK 3G investments. The facilities are predicted to be able to cover our capex over the coming year.

Looking forward, we will continue focusing on market conditions and the level of demand before. We have no plans to launch new deals but as I said, never say never.

  • 12 Sep 2003

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