好文推薦 – PCCW alienates its last friends: loan bankers

Shareholders are used to getting beaten up by PCCW. Banks, however, have had a chummy relationship with the company, a dependable deal generator and fee spinner.

The company’s attempts to take itself private, however, have wrong-footed the many institutions that have dependably supported the company over the years, thus paving PCCW chairman Richard Li’s road to tycoondom.

To back up a little, these are the details of the trade.

HSBC and Bank of China (BOC) are lending to the Singapore-listed Pacific Century Regional Developments (PCRD), which is also controlled by Li, and China Netcom, to fund their HK$15.9bn (US$2.05bn) take-private bid for PCCW.

The proposal will see Li (through PCRD) ending up with 66.7% of PCCW and China Netcom holding the remainder. HSBC is said to be providing bridge financing of up to HK$10.6bn, while BOC has committed HK$5.3bn to China Netcom. The deal will have a tenor of longer than two months.

The take-private scheme still has to win approval from Hong Kong’s High Court, which will hear the case on February 24. That timeline seems difficult to achieve given that the Securities and Futures Commission (SFC) is investigating allegations of vote-buying following a rancorous EGM on February 4, when shareholders approved the deal under controversial circumstances. (See Hong Kong Equity capital markets.)

Even if the court grants its blessings, those opposing the plan could go to the Court of Final Appeal, which would add many months to the approval process.

The prickliest issue is a planned payment of HK$17.6bn as a special dividend to PCRD and China Netcom soon after the buyout goes through.

This has riled minority shareholders, who note that the dividend is more than shareholders were paid in the take-private process.

Lenders to a HK$23.8bn three-tranche loan signed in late September 2008 are also irked by recent events.

In May 2008 PCCW unveiled a plan to place its telecom assets into HKT Group, and then sell a 45% stake in the business to strategic investors.

However, six months later PCCW was forced to call off the sale after receiving low-ball bids for the stake from the seven short-listed bidders, which valued the company at around US$1bn.

As such, Li announced in mid-October 2008 his plan to take the company private, with the blessing of China Netcom.

Lenders gladly joined the HK$23.8bn loan, taken by HKT Group, which was part of the restructuring supporting the take-private plan.

The borrowing was a straightforward refinancing. Up to HK$16.6bn from the proceeds of that loan repaid debt at PCCW. The remaining HK$7.2bn went to PCCW. Given the lack of dealflow in the year, 20 lenders piled into the deal, which paid an apparently attractive all-in of 181.6bp over Hibor.

However, the recent take-private attempt now makes the September 2008 loan look like an indirect leveraged recapitalisation.

“Lenders participating in that deal in September 2008 look foolish. They have subsidised a leveraged recapitalisation of the company,” said one banker.

Had they known at the time of signing that PCCW would be privatised and the payment of the special dividend would take place, lenders would have assessed the deal differently.

As has been the practice with most such borrowings for investment-grade borrowers, the lenders did not push HKT Group too hard on covenants, particularly those relating to dividend payments. Indicative of the long leash that banks put on HKT on the deal, the covenants are tested at a leisurely pace of once a year.

Friends of PCCW defended the series of deals, noting that the September borrowing was at the opco level, whereas the privatisation and the dividend payment are taking place at the holdco level. As the holdco is the entity being taken private, this is of no concern to lenders to the opco one step below.

However, it is not clear if the covenants on the loan apply to the opco or on a consolidated basis for the group. If it is the latter and should the special dividend be paid out, participants in the September loan will be looking at a much riskier, much depleted credit.

To boot, the holdco won’t be publicly listed and won’t have to comply with basic disclosure and governance standards of the Hong Kong listed companies.

Finally, and most meaningfully, lenders have to contend with the fact that the holdco is in a much weaker position to support the opco should it run into funding problems.

“If your father had US$1m and he gave it away to someone, it might not impact you on a standalone basis. However, it does impact your family’s financial standing,” said one banker.

Several bankers involved in the September loan have said they would not have done the deal if they knew about the take-private plan.

HSBC’s commitment to PCRD on the bridge is a smart move. If the privatisation fails, it does not have to fund PCRD. Otherwise, the money provided under the bridge gets repaid through the dividend payment.