Tech Center: Despite CyberWorks' Failed Bond Sale, Debt Default Is Unlikely, Analysts Say
By MATT POTTINGER
Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- Its attempt at a blockbuster bond issue has crashed and burned, its share price has hit its lowest point in years, and Pacific Century CyberWorks Ltd. still puzzles over the same conundrum: how to refinance the US$4.7 billion in debt that threatens to curtail its Internet and property investments.
Despite the tough times, the financial state of the Hong Kong telephone and Internet group doesn't warrant hitting panic buttons yet, say market analysts and fund managers.
CyberWorks poses little risk of defaulting on its bank loans and still has time to take a second crack at a bond issue that would extend the maturity of debt and free up cash for its Internet and property ambitions.
"I think they have two or three years to refinance [the debt] before they feel any real pressure," said Stephen Cheng, head of credit research at UBS Warburg in Hong Kong.
CyberWorks' first attempt at a bond issue ended in failure on Friday, when the company's telephone subsidiary -- PCCW-HKT Telephone Ltd. -- canceled a planned US$2.5 billion, 10-year bond issue at the last minute. Investors weren't biting even when the company offered a yield of 3.12 percentage points above the comparable U.S. Treasury, so the company pulled the plug citing "unattractive" pricing. Morgan Stanley, J.P. Morgan Chase, HSBC and Barclays were the underwriters of the failed CyberWorks bond.
Shareholders weren't impressed. During afternoon trade in Hong Kong Monday, CyberWorks' share price tumbled to 1.97 Hong Kong dollars (25 U.S. cents), down 93% from its peak of HK$28.50 more than a year ago.
By the end of trade shares had recovered slightly to HK$2.025, down 4.7%, or 10 Hong Kong cents, on the day.
Investors cited waning confidence in the strategy of the company, led by 34-year-old Richard Li, and fears it was exhausting its options for raising capital.
The PCCW-HKT phone subsidiary is a cash cow that can comfortably service the US$4.7 billion it holds in syndicated bank loans, but the terms of those loans tightly restrict the flow of profit from the telephone company to the unprofitable parent company. The parent will eventually need those dividends to underwrite investments in consumer Internet products it says are at the heart of its long-term strategy, and to pay its share of a high-tech property development known as CyberPort.
A bond wouldn't carry the cash-flow restrictions of the loans, freeing up larger dividends to the parent to spend on its projects.
While the parent has enough cash -- about US$1 billion -- to cover those investments for the next couple of years, the situation becomes hazier after that, especially with a US$1.1 billion convertible bond coming due in 2005.
The good news for CyberWorks is that fund managers say they might be more receptive to a lower-yielding bond under better market conditions. Billions of dollars of bonds were offered in the region in recent weeks, exhausting demand, and global confidence has weakened after Argentina warned it would default on its loans.
Write to Matt Pottinger at matt.pottinger@awsj.com2
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