Hutchison Whampoa Ltd. is a Hong Kong-based conglomerate that has achieved significant growth in recent years. However, many of its businesses require large upfront capital investments and have long investment periods before generating positive cash flows. This creates a mismatch with Hutchison's current reliance on short-term bank loans for financing. To fund its future capital needs, estimated at over $5 billion in the next 5 years, Hutchison is considering different debt financing options like syndicated bank loans, bonds, or equity issues. A Yankee bond offering was selected to obtain long-term fixed-rate funding given Hutchison's diverse global operations and attractive market conditions.
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HUTCHISON WHAMPOA LTD.: THE CAPITAL STRUCTURE DECISION
Hutchison Whampoa Ltd. is a Hong Kong-based conglomerate that has achieved significant growth in recent years. However, many of its businesses require large upfront capital investments and have long investment periods before generating positive cash flows. This creates a mismatch with Hutchison's current reliance on short-term bank loans for financing. To fund its future capital needs, estimated at over $5 billion in the next 5 years, Hutchison is considering different debt financing options like syndicated bank loans, bonds, or equity issues. A Yankee bond offering was selected to obtain long-term fixed-rate funding given Hutchison's diverse global operations and attractive market conditions.
Hutchison Whampoa Ltd. is a Hong Kong-based conglomerate that has achieved significant growth in recent years. However, many of its businesses require large upfront capital investments and have long investment periods before generating positive cash flows. This creates a mismatch with Hutchison's current reliance on short-term bank loans for financing. To fund its future capital needs, estimated at over $5 billion in the next 5 years, Hutchison is considering different debt financing options like syndicated bank loans, bonds, or equity issues. A Yankee bond offering was selected to obtain long-term fixed-rate funding given Hutchison's diverse global operations and attractive market conditions.
THE CAPI TAL STRUCTURE DECI SI ON CORPORATE FI NANCE-I I TERM I I I ( 2 0 1 2 ) PROF. K UL BI R SI NGH ( I MT-NAGPUR) BACKGROUND: HUTCHI SON WHAMPOA LTD Hutchison is a Hong Kong-based conglomerate with global operations in multiple business. Though it is a public company, Mr. Li Ka-Shing owns a significant share of the company. In recent years, Hutchison achieved significant growth. Revenue grew more than82 per cent between 1991 and 1995, while EPS increased by 87 per cent. It is important to notice that though Hutchison is well known in Hong Kong, it actually has a very sizeable operation internationally, e.g., Orange mobile telecommunication service in the U.K., Husky Oil in Canada, and many infrastructure and real estate projects around the world. Hutchison has also made significant commitments to mainland China, which is one of the worlds fastest growing economies. Prof. Kulbir Singh (IMT-Nagpur) 2
BACKGROUND: HUTCHI SON WHAMPOA LTD Many of Hutchisons businesses such as real estate, energy, port operations and telecommunication required significant up-front capital outlays. Projects usually took a long time o generate a positive cash flow and earn a return on investment. To match such a revenue stream, Hutchison would want to raise long-term financing. At the same time, it will have to take into consideration interest rate risks and foreign exchange exposures. Prof. Kulbir Singh (IMT-Nagpur) 3
CURRENT CAPI TAL STRUCTURE AND FUTURE CAPI TAL NEEDS Respite its aggressive growth, Hutchison has maintained a relatively conservative balance sheet. Long-term debt to capital ratio was 30 per cent in 1995 and 29 per cent in 1994. Cash flow statement: despite strong cash flows from current operations, still the co. used external financing to support its investment activities ($8.3 billion in 1995, $14 million in 1994). Exhibit 9: The co. has relied on bank loans and shorter- term debt (repayable within five years). Bank loans make up about 70% & almost 50% of the loans are repayable within five years. A significant portion of the not repayable within five years loans were a $5.96 billion 10-year FRN (floating rate note) issue in 1994 and repayable in 2004. Prof. Kulbir Singh (IMT-Nagpur) 4
CURRENT CAPI TAL STRUCTURE AND FUTURE CAPI TAL NEEDS The case reveals that Hong Kong companies tend to rely more on short-term, floating rate bank loans as their top choice of external financing. (why?) To remain financially flexible under all situations. Other research has suggested that lack of long- term, fixed rate investors and complex disclosing requirements could be two other explanations.
There is mismatch between Hutchisons long- term intensive capital investment with a shorter term, floating rate debt financing structure.
Prof. Kulbir Singh (IMT-Nagpur) 5
Compare debt financing and equity financing: Relative impact on stock price Exhibit 10: HWLs list of commitments made in 1994 and 1995 Analysts believe that HWL needs more than US$ 05 billion in next 5 years Attempt Q1.
Q1. Assume Hutchison Whampoa will require US$1 billion of financing in 1996. Assume that new equity can be raised at $48.8 a share and that a long-term debt issue will carry an interest cost of HIBOR plus 70 basis points (bps). How would an equity or debt issue impact on Hutchisons financial position and performance? See TN-1
Prof. Kulbir Singh (IMT-Nagpur) 6
Results show that EPS increase with debt Using constant P/E ratio, stock price will also increase.
Analyze the Modigliani and Miller proposition on the use of leverage and under what conditions leverage has a positive effect on EPS. Impact of tax on EPS
Prof. Kulbir Singh (IMT-Nagpur) 7
Should HWL issue straight forward new equity? Benefits????? Disadvantages???????? No. Then what is next alternative?
Prof. Kulbir Singh (IMT-Nagpur) 8
DEBT OPTI ONS What are different debt options Syndicated bank financing Straight debt Eurobonds and Yankee bonds. Public offering or Restricted offering (rule 144A)
Criteria Cost.??????? Maturity????? Floating vs. Fixed Rate ??????? Size of Capital Market ..????? Market Receptiveness?????
Prof. Kulbir Singh (IMT-Nagpur) 9
Any other criteria??? financing flexibility, foreign exchange exposure, in-house knowledge of the capital market and speed to the market.
Possible bond rating for HWL??? Use Exhibit 4 to 6 See TN-3 Whats importance of bond rating??? (see Exhibit 15)
See TN-4 : Analysis of debt options mix Prof. Kulbir Singh (IMT-Nagpur) 1 0
WHAT HAPPENED? WHAT HAPPENED? Hutchison Whampoa was assigned a A3/A+ rating from Moodys and Standard and Poors, respectively. The company decided to go ahead with a US$1 billion Yankee bond offering. The company had drawn on short- and medium-term loan facilities underwritten by banking syndicates for external financing. But with Hutchisons diverse and expanding operations, the needs of the group were beginning to extend beyond the local banking community. The need for long-term financing was also prompted by the recent reorganization of the Cheung Kong (Holdings) group, which resulted in Hutchison Whampoa acquiring an 84.58 per cent interest in Cheung Kong infrastructure. Moreover, the time was ripe to increase the ratio of fixed-rate funding at prevailing yields, which were currently attractive.