WSJ/ Tech Center: How PCCW's Strategy Irked Bond Investors
December 11, 2001
By MATT POTTINGER and PHILLIP DAY
Staff Reporters of THE WALL STREET JOURNAL
Pacific Century CyberWorks Ltd. just can't seem to stay in sync with investors.
As Chairman Richard Li transformed the company from a gamble on the Internet craze to one of Asia's largest telecommunications operators, bankers and investors fell over themselves to join the ride. But the bursting of the technology-stock bubble has transformed PCCW from the darling of the capital markets to a company struggling to regain its reputation as a winner. Aborted attempts at bond issues in the past two weeks show that PCCW isn't finding the road back an easy one.
The company stumbled in July, when it was forced to scrap a proposed US$2.5 billion bond issue, trumpeted as the biggest Asian bond deal outside Japan. The company bounced back with a string of smaller successful issues in October and November. Then came the company's latest approach to the bond market.
PCCW late last month was on the verge of launching 500 million euros ($444.7 million) in 10-year bonds and a smaller bond issue denominated in sterling, according to fund managers who were approached by investment banks to place orders for the bonds. But the planned deals met a wave of criticism in the marketplace. Investors complained that the company was breaking a pledge not to issue more debt so soon; some began selling its bonds in the secondary market.
Late on Nov. 30, PCCW issued a brief statement saying there would be no euro-denominated bond deal soon. Four days later, bankers working on the sterling deal sent a notice to fund managers: Their deal also would be postponed.
The awkward episode provides a glimpse inside the complex world of capital-markets deal making and illustrates how difficult it has been for PCCW to find its footing in it. Having been burned in July, PCCW was determined to avoid another mishap -- so determined that it changed its strategy for subsequent deals. Rather than shaping plans to issue debt with its bankers and then offering those deals to investors, PCCW instructed bankers to bring them deals that were already nearly complete. The new approach, while successful at first, left bankers constantly peppering the market with possible PCCW deals. Some of the promises those bankers made, ostensibly on PCCW's behalf, came back to haunt the company. And by farming out its bond strategy to bankers who didn't have a specific mandate, the company lost touch with market sentiment at a crucial time.
Few participants in the tightly knit bond-market community were willing to speak publicly about PCCW's latest difficulties. Key players in the market -- big companies, investment banks and large investors -- rely on good relations with the others for access to deals. But in a series of interviews over the past two weeks, people involved explained how PCCW's attempts to reshape its relations with investment bankers led to some of the confusion in recent weeks.
PCCW declined to comment on its capital-raising strategy. The company has no urgent need to raise cash at the moment. And the company can always approach the market later, once the grumbling in the market dies down -- though it may have to pay more to do so.
After the failed deal in July, PCCW made an important departure from normal investment-banking practices to ensure it would be insulated from future failures, according to a senior investment banker. Instead of working alongside its bankers once a strategy had been decided, PCCW would in the future insist that bankers approach it with bond deals that were as near to completion as possible. "After their experience [in July] they wanted people to come to them with a high degree of confidence that what they present will be as much of a guaranteed success as possible," he says.
At first the plan worked. With demand for Asian debt strong, bankers queued up to meet with PCCW Chief Financial Officer David Prince and executive committee Deputy Chairman Alex Arena with proposals, leaving the company to pick the ones it liked best. It went with a plan from J.P. Morgan Chase & Co. to sell $750 million in U.S.-dollar bonds.
But the marketing process planted the seeds of trouble in later deals. To attract the maximum interest in the bonds, JPMorgan offered up several enticements, according to fund managers who bought some of the bonds. Among them: The bond issue would be smaller than July's; its returns would be higher than those from similarly rated companies; and PCCW would refrain from issuing more bonds for a while.
The final point, designed to assuage worries that a new issue might drive down prices in the secondary market on existing bonds, didn't make it onto the prospectus for the bonds. It was left as an understanding between the participants, according to the fund managers.
With those provisions, the $750 million deal on Nov. 7 was a success. It went down so well, in fact, that PCCW dispatched JPMorgan bankers to sound out some of the same investors to see if they would object to PCCW issuing a second tranche of the bonds totaling $250 million.
That follow-up deal was completed less than two weeks later, seemingly without a hitch. But two days later, some holders of the U.S.-dollar bonds started selling them, and prices on the bonds fell as other Asian bonds were rallying -- evidence that investors' appetite for PCCW debt might be limited.
Just over a week later, Salomon Smith Barney was planning the euro-denominated issue, while Barclays Capital and UBS Warburg were working on a sterling-denominated bond, according to fund managers who were approached about the deals. Under PCCW's new arrangement with its bankers, Salomon was even soliciting preliminary orders for the bonds, a process known in the industry as "building the book," according to the fund managers. Salomon declined to comment on its dealings with PCCW.
As word of the euro issue spread, investors holding the dollar bonds began complaining to the media, and some started selling PCCW's dollar-denominated bonds in the secondary market. "People couldn't believe they were coming back again so soon," says a senior industry executive. The performance of PCCW's bonds in the market reflected that unhappiness. The yield on PCCW corporate bonds maturing in 2011 was quoted at 3.15 percentage point over the yield of U.S. Treasurys on Nov. 30, compared with 3.05 percentage points a day before.
The new issues "didn't fit the spirit of what they were saying when they sold the last issue, and the holders of the original issue weren't too happy about that," says a fund manager who bought some of the dollar issue.
The initial reaction of PCCW was to strongly deny it had ever suggested it would refrain from further debt issues. "There's absolutely no obligation on the part of PCCW to refrain from issuing any bonds in any currency," company spokeswoman Joan Wagner said at the time.
A JPMorgan banker says that the "general communication to the market" was that there wouldn't be subsequent deals.
By Nov. 30, the confusion had hit a peak. Much of the market was expecting the bond sale to proceed within days, while those upset with the new issue continued to complain. Still refusing to say whether or not it had been planning a deal, PCCW issued a statement that it had "no immediate plans' for a euro-denominated issue.
A senior executive at PCCW says, "We always get sales pitches by investment banks. If someone approaches and says, 'Hey, I have a good idea,' as a responsible manager you never say, 'I don't want to hear about it.' We'll always listen. It doesn't mean you have to take the idea."
Write to Matt Pottinger at matt.pottinger@awsj.com2 and Phillip Day at phillip.day@awsj.com3.
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