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Equity cult

30 November 2012 By Peter Thal Larsen

Hong Kong’s stock exchange is playing it safe. The bourse’s $1 billion share placing will allow it to repay more than half the debt it took on to buy the London Metals Exchange earlier this year. Ultra-low yields might make bonds look tempting. But a recent share rebound, and HKEx’s hefty dividend payout, justifies its cautious approach.

HKEx certainly got its timing right. The share issue -launched hours after UK regulators approved the LME deal – comes on the back of a 24 percent share price rally in the last four months, helped by a liquidity-fuelled rebound in Hong Kong trading volumes. Even though the issue dilutes existing shareholders by about 6 percent, new investors snapped up the stock at HK$118 a share – a discount of just 5.4 percent to the previous day’s closing price. And HKEx’s share price dropped by less than 1 percent on the news.

The placing, which comes just two months after HKEx’s $500 million convertible bond, means that the exchange has now refinanced the lion’s share of the $1.7 billion bridge loan it took out to pay for the $2.2 billion LME deal.

At first glance, Asia’s runaway bond market makes HKEx’s faith in equity and hybrid equity look quaint. Yet it has several good reasons to be cautious about leverage. For one, despite being a listed company for 12 years, HKEx has yet to issue a straightforward bond: it does not even have a formal credit rating.

A more pressing consideration is HKEx’s generous dividend policy: nine-tenths of its earnings in each of the past two years. It might not be able to keep that up if it had to make interest payments – which also explains the appeal of the convertible bond, which pays an annual coupon of just 0.5 percent.

HKEx’s dedication to the cult of equity is not absolute: in September, it merely promised that debt would not exceed 40-50 percent of its equity. Issuing some bonds to refinance the remainder of the bridge loan looks a no-brainer. But as long as HKEx continues to shower cash on its shareholders, there is limited scope for leveraging up.


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