Business trusts need careful consideration by regulators
People under pressure often make mistakes. So let's hope our regulators won't make any mistakes in the listing of Richard Li Tzar-kai's so-called business trust.
Even since his father, Li Ka-shing opted to list his ports in the form of a business trust in Singapore instead of Hong Kong, pressure on our regulators has been mounting.
The media say the lack of business trusts in the Hong Kong market proves our complacency in the face of competition from other markets. The government is pushing to catch up with Singapore.
But how quickly can it move when it does not even have laws to govern such trusts? The Securities and Futures Ordinance covers securities and real estate investment trusts, but not business trusts. It will take at least two years to change the law.
Hence Richard Li's proposal. This involves PCCW putting the cashflow of its telecommunications business into a business trust, with the assets held by a holding company. The business trust units will be 'stapled' to the underlying equities of the holding company to form 'stapled securities' that can be listed.
How will it get around the legal hurdles? The magic is in the equity element 'stapled' on.
But, unfortunately, it is like giving a cat plastic surgery to make it look like a dog to gain entry to a dogs-only club. That cat is not going to wag its tail or fetch sticks - no matter how gifted the plastic surgeon.
'Business trusts in Hong Kong will only be approved as a component of stapled security on the basis that dealings in stapled securities are subject to the insider dealing/market misconduct provisions and the disclosure of interests regime contained in the Securities and Futures Ordinance,' said a legal update from law firm Mayer Brown JSM.
'In this sense, the 'highest common standard' of regulation [when two different component products are involved] could be applied to the two components of the stapled security to bring the provisions of the Securities and Futures Ordinance to play.'
What could be clearer? Mayer Brown JSM is not involved in the deal but a source close to the spin-off said PCCW took a similar line when it talked to regulators.
Well, stapled securities are nothing new. Similar structures can be found in Australia. Shares of a developing business that invests a lot and pays low dividends are stapled to business trusts from a company with a mature and stable cashflow to give investors an balanced and attractive mix.
In the case of PCCW, however, it looks very much like creative work.
In fact, the whole spin-off is a testament to creativity. One telling example is the offer to allow holders of the business trust to remove the trustee-manager by a simple majority instead of 75 per cent as in the case of most trusts listed in Singapore.
That apparent solution to regulators' concern about minorities not having enough clout is worthless, since PCCW will control 55 per cent after the listing.
In fact, PCCW cannot hold less than that. The phone business accounts for 85.8 per cent of its revenue; 104 per cent of its earnings before interest and amortisation; and 90 per cent of its profit last year. Without 55 per cent control, PCCW will not be able to consolidate the profit of the phone business into its account, pass the listing test and get approval for the spin-off from the listing committee.
In short, the phone business will be underpinning the survival of two companies: PCCW and the new entity.
The whole exercise is about squaring the circle. To be fair, Li's lieutenants deserve some credit for their imaginative approach.
The company appears to be confident of regulatory approval by suggesting that the stapled security should list in the fourth quarter of the year. That suggests they expect approval no later than early November.
Should regulators approve it? Supporters may say the ends justify the means.
Regulators should not be bothered by this 'creativity' as long as the structure manages to provide unit investors with the same protection as in equities and real estate investment trusts, and Hong Kong wins business from Singapore.
The question is simple: What does Hong Kong need to do to become an international financial centre?
It certainly does not need products that show up our regulators as opportunistic or given to caving in to political pressure.
A product as controversial as a business trust should be introduced to the market only after proper consultation and the introduction of a proper set of rules. We did that with the less controversial reit.
There is no reason why it should be different this time.
Yes, we have lost some business to Singapore and we may lose more. But judging from the performance of business trusts over there, we shouldn't panic.
So far, none of the eight business trusts listed in Singapore have managed to fly. One has already de-listed, leaving the others struggling way below their offer price in thin trading.
Hutchison Ports Holding Trust, spun off by Li Ka-shing in March, is down 15 per cent from its offer price and City Spring Infrastructure Trust, which holds water and gas monopolies in Singapore has lost two thirds.
Singaporean brokers say investors do not know enough about the products and are not interested in learning more. So what's our rush?