Hutchison Whampoa Limited (Hutchison), the world’s largest port operator controlled by Hong Kong billionaire Li Ka-shing, announced on 17 January 2011, its proposal to spin off its port assets into a Singapore business trust and to raise up to US$6 billion in an IPO on the Main Board of Singapore Securities Trading Limited (SGX).
According to Hutchison, the newly established business trust, Hutchison Port Holdings Trust (HPH Trust), is expected to be listed in February or early March 2011. The IPO is subject to approval of the Hutchison board, the Monetary Authority of Singapore, the SGX and the Hong Kong Stock Exchange.
This is a key milestone in the development of the business trust structure in Singapore. It represents the first large scale launch of a business trust in the infrastructure sector by a non-Singaporean business. If successful, this IPO alone will raise more than the aggregate of Singapore’s 31 IPOs last year. This would be a significant boost to Singapore’s efforts to compete with the likes of Hong Kong and Shanghai as a leading financial centre in Asia.
The proposed transaction would be likely to involve the following simultaneous steps:
- Hutchison establishing HPH Trust and transferring all of its deep-water port operations into HPH Trust in consideration for the issue to Hutchison of units in HPH Trust;
- a Global Offering of units in HPH Trust comprising a public offering in Singapore, an international offering to professional, institutional and other investors and a preferential offering to shareholders in Hutchison; and
- a listing of the units of HPH Trust on the SGX.
Hutchison is likely to be a substantial unitholder in HPH Trust following the IPO with 25 per cent of the total issued units.
A business trust is a hybrid structure which combines elements of a company with elements of a unit trust. A business trust does not have a separate legal identity and is operated though a trustee manager. Investors in a business trust hold units rather than shares and their liability is limited to the amount paid by them for those units.
Hutchison’s decision to carry out the IPO in Singapore is, according to Hutchison, largely due to the benefits of the business trust structure (which is not generally available as a listed vehicle structure in Hong Kong) over standard corporate structures. These benefits include the following:
- the ability to pay distributions out of operating cash flows rather than accounting profits, which means that they offer a better combination of growth prospects and yield for investors than corporate vehicles;
- unlike other fund structures (such as limited partnerships), a business trust has no legal or regulatory restrictions on gearing;
- the ability for the sponsor to retain an economic interest in the assets of the business trust by receiving units in consideration for the assets transferred to the business trust;
- the sponsor retains an element of control over the assets as the business trust would be operated through a trustee manager which is typically a member of the sponsor’s group (although the board of directors of the trustee manager is subject to strict statutory rules governing its independence from, amongst others, substantial unitholders);
- certain Singapore tax incentives may be available to business trusts with offshore infrastructure assets;
- distributions from a business trust to unitholders are free from Singapore withholding tax and should not be subject to Singapore income tax. Singapore does not have a capital gains tax regime; and
- no stamp duty (or equivalent transfer tax) is payable on transfers of units.
We expect other significant players in the infrastructure sector to look closely at the business trust structure as a potentially attractive means of releasing value as well as accessing the capital markets for future funding requirements.
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