PCCW Trust – BT

Downside of a PCCW trust listing here

PLANS by Hong Kong's PCCW to spin off and list its telecoms assets there have been effectively stonewalled. Last Wednesday, Hong Kong regulators firmly said 'no' to the fixed-line and broadband service operator's plan to list a telecoms business trust on the world's most bustling bourse and PCCW's home market.

Hong Kong's decision more or less pushes PCCW into the arms of a player patiently waiting in the wings: Singapore, which is the only Asian listing site to allow business trusts on board.

Neither the Hong Kong authorities nor PCCW gave clear reasons why the lobby failed. PCCW is appealing the decision.

Erring on the side of being a killjoy, the question is this: is it necessarily a boon for Singapore to take on PCCW's business?

Singapore had earlier this year scored a coup over Hong Kong with Hutchison Port Holdings Trust's US$5.5 billion IPO.

But HPH Trust's high profile listing also revived arguments about corporate governance issues attached to business trusts, arguments which are also relevant to PCCW.

Some allege that because trust sponsors usually hold at least 25 per cent of the units, it makes the trusts 'acquisition bid-proof'.

In other words, the sponsors' interests may be entrenched within the trust structure. In Asia, where it is common to find families controlling a bloc of more than 50 per cent of a company, a trust may be yet another mode for families or a majority shareholder to fend off any attempts to acquire the trust's assets.

That a trust's business is managed by the trustee-manager is also another problem. Shareholders are further removed from having a say, and removing a trustee-manager requires at least 75 per cent of unitholders' votes.

Those are the self-same arguments against business trusts.

But in PCCW's case, a new issue surfaces: disclosure.

That is, SGX and the trust should disclose why PCCW's trust application was rejected by Hong Kong in the first place, and not sweep it under the carpet.

It may not have been the corporate governance issues that made Hong Kong turn PCCW away.

Some are saying the Hong Kong stock exchange was concerned that the remaining bits of PCCW would not have made for viable business, after it put 90 per cent of its operations in a trust.

Add to this the fact that chairman Richard Li has tried many times to dispose of PCCW's fixed-line and broadband assets – the cash cow of the group, but also with worryingly high debt ratios.

Moody's had put this core business on its downgrade watch list, because of PCCW's 'failure to reduce leverage year on year'.

PCCW's annual report shows that the group has a high gross debt to total assets ratio of 73 per cent, although it's unclear how much of it is borne by the assets targeted for the trust.

Arguably, business trusts were designed for such capital-intensive businesses as they aren't subject to caps on gearing ratios.

However, most keep this modest and attempt to deleverage – rather than keep it persistently high. High financing levels may mean slashing distributions to conserve cash.

Having business trusts viewed as a convenient dumping ground for a company's highly geared assets might not add good value to Singapore's trust listings niche.

If it does comes to pass that PCCW's trust structure heads here, both the trust and SGX should try to reassure investors that PCCW's debt ratios are not at runaway levels and would not compromise future cash flow or distributions. If not, SGX might increasingly be known as the destination for 'regulation arbitrage' – where a company could benefit from laxer rules and standards in one jurisdiction over another.