Hongkong Electric close to powered spin-off
Power Assets is nearing its HK$40 billion spin-off of Hongkong Electric, which will hold all its power assets in the city.
The market knows the initial public offering is near because Hongkong Electric is close to finalising a HK$37.5 billion club loan, which is essential for leveraging the asset to create cash to pay to Power Assets, which is 38.87 per cent owned by Cheung Kong Infrastructure.
Power Assets, the sole electricity supplier to Hong Kong and Lamma islands, said in September that it was planning the spin-off listing, with Goldman Sachs and HSBC leading the offering expected in the first quarter of next year.
The huge club loan that is wending through markets makes the deal work. Proceeds from the loan will give Hongkong Electric a large part of the cash it needs to pay for the electricity units it is buying from Power Assets.
"Hongkong Electric's debt will go up substantially, while Power Assets should be cash-positive," CLSA analyst Rajesh Panjwani said of the outcome.
Last Thursday, Standard & Poor's put the ratings of Hongkong Electric and Power Assets on review with negative implications.
"We kept Hongkong Electric on credit watch because of the risk of a significant increase in leverage and reduced parental support if its still-pending spin-off materialises and undermines its financial strength," credit analyst Gloria Lu said.
S&P said it was reviewing Power Assets rating on the view that its cash flow from Hongkong Electric would drop after the spin-off.
Panjwani said Hongkong Electric would use proceeds from the initial public offering and loan to pay back a HK$20 billion interest-free loan to Power Assets.
The end result will be up to HK$50 billion of debt with Hongkong Electric at listing, but with Power Assets debt-free and cashed up for acquisitions.
"They will use the IPO as an equity cheque for further acquisitions … they are looking for more power distribution assets in Europe," said a corporate finance specialist close to the club loan.
There are precedents in such funding. Langham Hospitality Investments borrowed HK$6.8 billion from Deutsche Bank, HSBC and Citi ahead of its listing in May and NW Hotel Investments arranged for an HK$8.59 billion loan before its planned listing in June.
Likewise, when Hutchison Whampoa listed Hutchison Port in Singapore in March 2011, it took a US$3 billion syndicated loan a month beforehand.
Langham, NW Hotel, Hutchison Port and Hongkong Electric have one thing in common: they are all business trusts.
Business trusts are marketed to investors as an income play with reliable, inflation-beating distributions. Unlike the real estate investment trust, regulators put no limits on business trusts' debt levels, which means they can borrow indefinitely.
This is particularly advantageous at listing because issuers can use leverage to increase distributions, making them attractive to investors.
Panjwani said the club loan would be used partly to increase Hongkong Electric's distributions, or yield, to investors.
Power Assets was putting debt on to Hongkong Electric partly because it made corpo- rate finance sense to inject some debt into the listed entity, said a banker involved in the club loan.
"Any company that is getting spun off will want debt … companies want the right mix of debt and equity [capital]," the banker said.
The loan is being marketed at 130 basis points above the Hong Kong interbank offered rate, which was described as attractive by a banker at a large lending institution.
"[Cheung Kong] have a great following among banks," he said.
Banks that lead a loan tend to have a lock on the listing mandate. Goldman and HSBC are leading the club loan, just as they are joint sponsors for the imminent share offering.
Likewise, DBS Bank, Deutsche Bank and Goldman led the loan in the run-up to Hutchison Port's listing and were also involved in the share sale.
All of this may be just a primer to the main event, Hutchison's proposed spin-off of retail businesses under AS Watson, which could raise about HK$100 billion.
Bankers anticipate another giant loan to precede that spin-off and other financing - positioning it as a major fee payer next year.