In May 2012, CVC Asia Pacific completed a HK$5.15 billion (US$663 million) leveraged buyout (LBO) of the Hong Kong Broadband Network (HKBN) and IDD business of City Telecom (CTI), including HK$2.65 billion equity capital and a HK$2.5 billion syndicated loan.

The deal was recognized as Hong Kong deal of the year in The Asset’s country awards and best leveraged finance deal in The Asset’s regional awards.

Lai Ni Quiaque (黎汝杰), HKBN’s head of talent engagement and chief financial officer, recalls that the company “went through a lot in 2012”: a management buyout (MBO) along with refinancing, within six months, the HK$2.5 billion syndicated loan as “a covenant-lite US dollar, Reg S bond”.

He adds: “Because of the five-year bond, I sleep very well. When we had the bank debt, I tossed and turned a bit at night because there were quite a few covenants, but I still slept OK.”

Explaining the decision not to do a rating, Lai says HKBN wanted to “get out of the junk bond box and price closer to investment grade, because irrespective of the business, we would have been a junk bond due to our size”.

As it was, the bond was priced at 5.25% and 20× oversubscribed.

While the company is the largest fibre carrier in Hong Kong and big in terms of its market share, Lai describes Hong Kong as a small market. Over four fifths of Hong Kong homes have a broadband connection, but fewer than half have a fibre-optic connection.

Diverse investor base
HKBN focussed on local, private bankers as an investor base, rather than on fund managers who need to invest in rated debt.

“We like to work with banks that help us find arbitrage opportunities,” he asserts. “Banks that come in and say that there is mispricing in the market. It could be between geographies, between asset classes, it could be between Reg S and 144a. If they can help us highlight these features, then that is the kind of bank we like to work with.”

Lai has a long history of capitalizing on such opportunities. In 2010, for example, CTI tried a HK$3.50 per share private placement in Hong Kong and failed. Three months later, it completed a 4× oversubscribed private placement in the US at a higher price of HK$5 a share, benefiting from its strong shareholder base in the US built up following the dual listing. Lai notes that in the late 1990s, the massive premium for firms listed in Hong Kong opened up opportunities for secondary listings in the US.

Sights on an IPO
An “extremely strong” treasury foundation enables Lai to dedicate time to talent engagement in addition to the more routine CFO concerns, such as cash and debt management. Customers sign up for two-year contracts and bad debt levels consistently account for less than 1% of revenue, ensuring a high level of cash flow predictability. Also, gross margins are as high as 90%.

Employee engagement was deepened following the acquisition of a 14% equity stake in HKBN by 63 of the company’s employees from CVC Asia Pacific for HK$165 million – the MBO that Lai refers to above.

His colleagues have much to learn from Lai’s experience. He used to be Credit Suisse’s head of Asia telecom research. In 1999, he helped fund the business plan to build the fibre network. “Four years later, I sold my home and took an 80% pay cut to join CTI.” After joining the firm in 2004, he acquired a 2% stake in CTI. “I became a shareholder of the old company, now I’m a co-owner [of the new company],” he says. “A key focus for us has been educating the 62 co-owners [apart from myself] about the process of being a co-owner.”

Just as CTI, HKBN has its sights on an initial public offering (IPO), which is “due by June 2015”, according to Lai. “What keeps us excited is execution,” he professes. “How are we going to play out the plan? What type of IPO [do we undertake]? Do we accelerate the IPO?”

In his view, HKBN will succeed or fail because of operations, not because of balance sheet or yield enhancement. “Building infrastructure,” he points out, “is a very long-term business.”