WRAP:PCCW Conv Bond A Long-Term Positive But Shr Dips
January 18, 2002
Dow Jones Newswires
By ANETTE JONSSON
Of DOW JONES NEWSWIRES
HONG KONG -- Underlining its determination to trim interest costs, Pacific Century CyberWorks Ltd. (PCW) chinched another debt refinancing deal Thursday, which analysts said is beneficial in the long term.
However, the share price tumbled Friday as the structure of the deal - a five-year convertible bond - means investors who want to hedge the bond position will have to go short of PCCW shares.
At the close of trading Friday, the share was down 3.4%, or 7.5 HK cents, at HK$2.15, having outdone all other stocks in terms of the value of shares traded. A large portion of this was accounted for by short-selling.
During the session about 66.1 million PCCW shares, valued at HK$141.8 million, were sold short, according to stock exchange data.
One bond analyst said the short-selling may be limited because it's currently difficult to borrow PCCW shares, which is necessary in order to settle the trade. However, others said PCCW management may well contribute shares for this reason through the bookrunner.
"This kind of selling may last two to three, maybe four days, but after that the price should recover as the bond is a good way to raise fresh money and cut costs," said one analyst who declined to be named.
If the bonds are never converted the company has obtained financing at a yield to maturity of 4.5%, which is only about 30 basis points above the 10-year U.S. Treasury, he said.
At the same time, the company has issued equity at a significant premium to the current market price, he added.
"In our opinion, the company is no longer in jeopardy of facing a cash crunch as principal repayment has been pushed out of the critical years," UBS Warburg analyst Jasmine Koh said in a research note.
She added that after three consecutive debt placements, PCCW is now halfway through retiring its US$4.7 billion term loan, which it took out a year ago to finance the takeover of former telecom monopoly Cable & Wireless HKT.
PCCW said it's issuing US$450 million of convertible bonds due in January 2007 through Morgan Stanley & Co. International Ltd., with an option to increase the size to US$517.5 million.
The bond, which is guaranteed jointly by PCCW and its fixed-line telecom arm PCCW-HKT Telephone Ltd., has a 1% coupon and will be redeemed at a 19.383% premium to the principle amount, resulting in the 4.5% yield to maturity.
The bonds are convertible into PCCW shares at HK$2.75, which represents a 23.6% premium over PCCW's closing share price of HK$2.225 before the deal was closed late Thursday.
The bonds met with significant demand, according to market sources who said it was around five times oversubscribed.
Paul Aiello, managing director and co-head of Morgan Stanley's TMT investment banking team in Asia Pacific, said the bond saw strong demand from both Europe and Asia and added that it was predominantly sold to long-term value investors that are active in the convertible bond market.
While Morgan Stanley didn't want to comment on the subscription level or the likelihood that the option to increase the deal will be exercised, Aiello said the book was closed in three hours.
The size was also increased from the initially planned US$400 million which, together with the fact that the bonds were trading slightly above par Friday, suggests that the full US$517.5 million may be issued, analysts said.
This would leave PCCW with net proceeds of around US$504 million, most of which it intends to use to repay its existing US$4.7 billion loan held by PCCW-HKT.
Since the US$1.5 billion three-year tranche of that loan was meant to be refinanced after the company issued US$1 billion of 10-year bonds in November, the convertible bond is expected to go toward the refinancing of loan's five-year tranche, analysts said. This amounts to US$2.3 billion, is due in 2006 and has an interest rate of 115 basis points above the London interbank offered rate, analysts said.
The term loan also contains a US$900 million seven-year tranche with an interest rate of 145 basis points above Libor.
Analysts estimated that the company may save an average US$10-US$20 million per year by replacing part of the floating-rate interest, which it's now locked into with a fixed 1% coupon.
This could help boost net earnings per share by between 2% and 3%, they said.
The buyers should be happy with the deal as well, according to Aiello, who described the bond as a win-win situation for both PCCW and investors.
"Investors get a fairly priced five-year option and access to the equity upside, while at the same time they are protected on the downside by PCCW's strong credit (rating)," he said.
For PCCW's part, the bond issue wasn't large enough to have any material impact on the company's earnings, analysts said. Nor did it make them change their current recommendations, as there are other issues continuing to burden the share price. One of the most cited is the fact that the share trades at higher valuation multiples than most of the incumbent telecom operators globally.
"This means that the stock doesn't suffer from a distress-discount, meaning that we can't award any credit for a more stable debt outlook," Deutsche Bank analyst Nigel Coe said in a written comment.
Coe currently has a market perform rating on the stock and a 12-month target price of HK$1.90.
The potential 5%-6% dilution of the share capital if the bonds are converted was also mentioned as a negative, although several analysts shrugged that off as fairly insignificant.
One analyst said that if the shares are indeed converted, it means PCCW will save further on the interest cost.
He added that the fact that PCCW chose to issue a convertible this time shows that the company continues to plan its refinancing quite smartly since tough market conditions forced it to scrap a massive U.S. dollar bond in June.
"It has gone about it in the right way, approaching different markets, launching it in small tranches and using different lead managers," he said.
In the past three months the company has issued 30 trillion yen worth of 30-year Eurobonds via Merrill Lynch, US$1 billion worth of 10-year global bonds via JP Morgan and now this convertible via Morgan Stanley.
And more deals can be expected as long as interest rates remain low.
"The company will always be tempted to refinance at lower costs and I don't see any reason why it would stop now," said Agnes Ho, analyst with Merrill Lynch.
The successful placement of PCCW's convertible bond - the first by an Asian issuer this year - may also have wider implications for the market.
The bond "is a vote of confidence by international investors not only in PCCW but also in the Asian (telecom) incumbents," Morgan Stanley's Aiello said.
The deal's success will contribute to a more positive market sentiment for other bond issuers in Hong Kong and the rest of the region, he added.
-By Anette Jonsson, Dow Jones Newswires; 852-2802-7002; anette.jonsson@dowjones.com
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