Philippine port operator International Container Terminal Services Inc (ICTSI) continued to embark on its capital management exercise as it priced on January 22 a US$300 million offering of senior perpetual capital securities to redeem the more expensive subordinated perpetual notes callable in 2016.
The Reg S hybrid notes, issued through Royal Capital, are callable in year 4.25 and are priced at 99.551% to yield 6.375%. This was at the tight end of the final price guidance of 6.50% area (+/- 12.5bp).
About US$230 million of the new senior perpetual securities were used to buy back the company’s existing 8.375% subordinated perpetual notes that are callable in 2016, thus realizing a cost saving of 2%. The tender price was US$1,076.25 per US$1,000.
The rate of distribution for the new perpetual securities was set at 6.25% and it will be reset every five years from May 5 2019 and will increase by 2.50% on May 5 2024, in each case if the new securities were not already redeemed.
“This transaction is part of our overall capital management exercise,” ICTSI treasurer Rafael Jose Consing Jr explains. “This is to extend the duration of the call dates on our perpetual capital issues and to reduce our cost of capital.” It will also term out ICTSI’s financing to better match its long-term port concessions, which have maturities of up to 2055.
The deal is significant in several respects. The tender offer is the first such transaction targeting repurchase of US dollar perpetual securities in Asia, while the new perpetual securities represent the first issuance of US dollar senior perpetual securities by a Philippine issuer. This is also the first Asian corporate liability management exercise and the first senior corporate hybrid capital trade globally in 2015.
The transaction also sought to monetize the accounting arbitrage. When ICTSI launched its first perpetual capital securities in 2011, subordinated perpetual bonds were the most obvious structure to obtain equity credit. However, as Consing points out, the International Financial Reporting Standards (IFRS) has made further clarifications that even senior perpetual bonds can be deemed equity, provided they meet certain minimum features.
Consistent with the requirements for equity under the IFRS, ICTSI may resolve at its discretion, to defer payment of distribution otherwise payable on a distribution payment date.
“While shifting the instrument from subordinated to senior, we gave the investors a better risk profile, yet it offers them a higher yield comparable to a long-dated senior instrument,” Consing adds. “By doing so, we were able to bring down our cost on the equity.”
Theoretically, Consing says ICTSI could have tightened the pricing further than 6.375% on the back of a strong order book amounting to US$1.2 billion. But it did not do so as this is one way by which investors can take some upside for the risk that they are taking in the prevailing market environment
The new money component under the transaction is US$51 million, which will be used for refinancing and other general corporate purposes. He notes they could have done this latest capital management exercise on a zero cash out, but decided to bring the deal size to US$300 million – the minimum amount that a deal can be considered part of a certain index.
This is due to the firm having enough funds as the revolving facility that ICTSI signed in 2014 amounting to US$350 million is still fully undrawn. That would finance its capital expenditures programme this year, says Consing.
In terms of geographic distribution, the new perpetual securities were sold 86% in Asia and 14% in Europe. By type of investors, fund managers accounted for 69%, private banks 23%, banks 7% and insurance companies 1%.
Citi and HSBC were the joint lead managers for the perpetual securities while Deutsche Bank acted as co-manager. Citi and HSBC were also the dealer-managers for the tender offer.
