Standard & Poor's (S&P) will keep the long-term debt rating of Hong Kong Telecommunications (HKT), part of the PCCW Group, on CreditWatch Negative status, citing uncertainties about its planned spin-off.
Shareholders of PCCW, the telecommunications and media giant controlled by chairman Richard Li Tzar-kai, last Wednesday gave the green light to HKT to separately list its telecommunications operations as a business trust, which would be the first such initial public offering of its kind in Hong Kong.
S&P had placed HKT's investment-grade 'BBB' rating on CreditWatch with negative implications on March 25, days after PCCW said it was in discussions with Hong Kong authorities about the feasibility of that spin-off and proposed business trust IPO. S&P estimated that HKT's debt remained high for its current rating. A business trust combines elements of a company with elements of a unit trust. It lacks a separate legal identity and is controlled by a trustee manager, typically an affiliate of the company setting up the trust. Investors also hold units rather than shares, and their liability is limited to the amount they paid for those units.
PCCW proposed to retain no less than 55 per cent ownership in the business trust entity, called the HKT Trust, and serve as its trustee-manager. Investors will receive so-called shared stapled units of the HKT Trust and HKT, the holding company of the telecommunications business.
The trust listing is expected to proceed next month.
'The timing, quantity of stapled units in the listing, and amount of net proceeds and debt reduction associated with this process remain uncertain,' said S&P credit analyst Park Jun-hong. 'We will continue to take a consolidated view of the PCCW group when analysing HKT's credit profile.'
The proposed business trust listing is expected to generate between HK$6.8 billion and HK$10 billion, according to PCCW. The proceeds will be used to repay some of the existing loans of its telecommunications business.
'If PCCW fails to deleverage its balance sheet to levels more consistent with the current rating on HKT, we will likely lower the rating by one notch,' Park said. 'We could revise the outlook to stable if PCCW significantly deleverages its balance sheet through the trust listing.'
Li, however, said last week that PCCW would proceed with the spin-off if the HKT Trust achieved a minimum market capitalisation of HK$28.6 billion.