PP HONG KONG
SPS 900
CYPHER/CAT A
FROM E.C.G.D. 301795Z
HRK 164/1
HKC
(258)
CONFIDENTIAL
TRE)
TO PRIORITY HONG KONG TELNO EXCED 32 OF 30 NOVEMBER.
FOR MARCH FROM BIRCH.
NO DIST BUTION
HONG KONG POWER STATION,
1. FOLLOWING PRESENTATION OF WARDLEY OFFER ON FINANCING FOR ABOVE
WE OPENED NEGOTIATIONS WITH THEM ON THE LEVEL OF MARGIN OR **SPREAD** ATTACHING TO THE HONG KONG DOLLAR LENDING. (THE SPREAD IS THE RATE PERCENT ABOVE BEST LENDING RATE AT WHICH THE BANKS ARE PREPARED TO LEND AND TAKEN WITH BLR DETERMINES THE RATE OF INTEREST PAYABLE BY HMG TO THE LENDERS AS OPPOSED TO THE RATE OF INTEREST PAYABLE BY THE BORROWER.)
2. AS YOU KNOW WARDLEYS HAS PROPOSED:
(1) 2 PER CENT MARGIN SPREAD OVER BEST LENDING RATE FOR PROVISIONS OF HK DOLLAR 1600M
(1) TRANSFER FEE OF APPROXIMATELY 7-8 PER CENT OF LOAN VALUE FOR EXCHANGE OF HONG KONG DOLLARS INTO US DOLLARS AS OFF- MARKET OPERATION AT PRE-DETERMINED RATE OF EXCHANGE.
(1) FEES AND COMMISSIONS AS SET OUT IN THEIR LETTER TO ME OF
19 OCTOBER
1977.
3. VIEW HERE IS THAT TRANSFER FEE IS TOO HIGH, HOWEVER AS IT FALLS UPON THE BUYER TO PAY AND FROM OUR POINT OF VIEW ONLY HAS THE EFFECT OF RAISING THE LOAN REQUIRED TO FINANCE PROJECT BY AMOUNT OF
FEE IT HAS BEEN AGREED THAT THIS SHOULD BE LEFT TO CLP AND LENDERS
TO NEGOTIATE BETWEEN THEM. CLP AS YOU KNOW HAVE AGREED NOT TO APPROACH THE LENDERS ON THIS UNITL OUR NEGOTIATIONS WITH THEM ON THE SPREAD ARE COMPLETED.
4. ON OTHER FEES AND COMMISSIONS WE HAVE NO COMMENT AND HAVE TOLD WARDLEYS THAT WE FIND THEIR PROPOSALS ACCEPTABLE.
5. ON QUESTION OF SPREAD HOWEVER WE FEEL THAT 2 PER CENT IS
CONSIDERABLY ABOVE WHAT IS JUSTIFIED. FOR COMPARISON THE MASS TRANSIT HAVE RECENTLY NEGOTIATED AT A 1 1/2 PER CENT
SPREAD A LOAN WHICH ALTHOUGH ADMITTEDLY SMALLER AND INVOLVING
A SHORTER PERIOD IS IN MANY RESPECTS COMPARABLE WITH THE LOAN
REQUIRED FOR THE POWER STATION PROJECT. WE FEEL THAT SLIGHTLY
LONGER AVERAGE LIFE OF THE LATTER AND ITS GREATER SIZE DOES NOT WARRANT A 1/2 PER CENT SPREAD DIFFERENTIAL. IN ADDITION ALTHOUGH THEY CANNOT BE COMPARED DIRECTLY A 2 PER CENT SPREAD 15 CONSIDERABLY
ABOVE WHAT WE ARE ABLE TO NEGOTIATE ON THE EUROCURRENCY MARKET
WHERE POSITIONS ARE DECLINING AND SPREADS ARE CURRENTLY BETWEEN
1 PER CENT AND 1 1/8 PER CENT.
6. IN ORDER TO COMMENCE NEGOTIATIONS WE THEREFORE ASKED MILLS OF THE HONG KONG AND SHANGHAI BANK IN LONDON TO ACT AS INTERMEDIARY AND TRANSMIT A COUNTER PROPOSAL TO WARDLEYS OF 1 1/4 PER CENT FOR THE FIRST 5 YEARS 1 1/2 PER CENT FOR THE NEXT 5 YEARS AND 1 3/4 PER CENT FOR THE BALANCE OF THE LOAN PERIOD (3 1/2 YEARS).
WARDLEYS REACTION HAS BEEN ESSENTIALLY THAT 2 PER CENT IS NOT
NEGOTIABLE, THIS IN OUR VIEW IS EXCESSIVE MARGIN BY ANY
REASONABLE STANDARDS AND AN ATTEMPT BY THE HONG KONG BANKS
TO EXPLOIT THE SITUATION AT HMG'S EXPENSE. THEY HAVE DELAYED IN
MAKING THEIR RESPONSES TO OUR DISCUSSIONS WITH MILLS AND
WE SUSPECT ARE TRYING TO MANOEUVRE US INTO A POSITION WHERE TIME
IS SO SHORT THAT OUR SCOPE FOR NEGOTIATION IS LIMITED AND WE HAVE
NO ALTERNATIVE BUT TO ACCEPT WHATEVER SPREAD POSITIONS THEY REQUIRE.
7. IN ORDER TO TRY TO OBTAIN SOME ROOM FOR NEGOTIATION AND TO GENTUNELY EXPLORE AN ALTERNATIVE METHOD OF FINANCING WE ARE
LOOKING MORE CLOSELY AT THE POSSIBILITY OF EURODOLLAR FINANCE. ALTHOUGH WE RECOGNISE THAT OUR ABILITY TO UTILISE US DOLLAR
FINANCE IN PREFERENCE TO HONG KONG DOLLARS WILL BE SUBJECT TO
KADOORIE'S REACTION WE HOPE THAT AT THE VERY LEAST THE MOVE
WILL ENABLE US TO NEGOTIATE FROM A STRONGER POSITION FOR A LOWER
SPREAD ON THE HONG KONG DOLLARS ROUTE WHICH REMAINS OUR
PREFERRED ALTERNATIVE.
9. GIVEN KADOORIE'S PREFERENCE FOR HONG KONG DOLLAR FINANCE WE
ARE ANXIOUS THAT HE SHOULD NOT HEAR THIS NEWS SECONDHAND. IN PARTICULAR WE WISH TO AVOID ANY REACTION FROM KADOORIE SPOILING
OUR ATTEMPT TO IMPROVE OUR BARGAINING POSITIONS. WE THEREFORE
PROPOSE THAT YOU SHOULD SPEAK TO HIM ON FOLLOWING LINES,
9. **WE HAVE BEEN IN NEGOTIATION FOR SOME TIME WITH THE LENDERS
ON THE TERMS OF THE HONG KONG DOLLAR FINANCE. THERE ARE CERTAIN
ASPECTS OF THE PROPOSED LOAN WHICH ARE NOT FAVOURABLE TO
EITHER CLP OR OURSELVES. CLP HAVE BEEN ASKED TO PAY A TRANSFER FEE WHICH WE CONSIDER EXCESSIVE. WE ON THE OTHER HAND ARE BEING ASKED TO ACCEPT A SPREAD CONSIDERABLY HIGHER THAN THAT AGREED
FOR THE MASS TRANSIT LOAN, ALTHOUGH WE RECOGNISE THAT THE POWER STATION LOAN WILL BE LARGER AND INVOLVE A LONGER
LENDING PERIOD THAN THE LATTER WE FEEL THAT THE DIFFERENTIAL BEING SOUGHT BY THE LENDERS - 1/2 PER CENT MORE THAN THE MASS TRANSIT LOAN - IS TOO LARGE. WHILST WE THEREFORE DO NOT WISH TO
CLOSE THE DOOR TO HONG KONG DOLLAR FINANCING WE ARE NOW LOOKING
MORE CLOSELY AT THE US DOLLAR ALTERNATIVE."
19. YOU SHOULD AVOID ANY SUGGESTION THAT WE HAVE ABANDONED HOPE OF ACHIEVING A SATISFACTORY POSITION WITH THE HONG KONG BANKS HOWEVER. THE INFORMATION IN PARAS 2 TO 8 SHOULD BE TREATED AS CONFIDENTIAL AND FOR YOUR OWN INFORMATION. WE SHOULD BE GREATEFUL HOWEVER IF YOU COULD ACQUAINT FINANCIAL SECRETARY WITH CONTENTS OF THIS TELEGRAM.
11. ELLIOTT, FOXALL AND I PLAN TO VISIT HONG KONG AHEAD OF THE MAIN PARTY'S ARRIVAL IN LATE DECEMBER. WE PLAN TO BE IN HONG KONG FOR MEETINGS FROM WEDNESDAY 7TH ONWARDS. WE WOULD PROPOSE TO SEEK INTERVIEW WITH FINANCIAL SECRETARY FIRST AND WOULD BE GRATEFUL IF YOU COULD ARRANGE THIS FOR THE 7TH. PURPOSE OF VISIT WOULD BE TO ACQUAINT HIM WITH LATEST DEVELOPMENTS AND TO MAKE HIM AWARE OF OUR ATTITUDE TO HONG KONG BANKS DEMANDS
ON LEVEL OF SPREAD AND TRANSFER FEE. THEREAFTER WE PROPSE DISCUSSIONS ON SECURITY WITH CLP, WE SHOULD OF COURSE ALSO BE
AVAILABLE FOR DISCUSSIONS WITH LENDERS AND WARDLEYS AND WE WOULD HOPE THAT THEY WOULD TAKE THE OPPORTUNITY OF OUR PRESENCE
IN HONG KONG TO REACH A COMPROMISE WITH US ON THE SPREAD POSITION.
12. ELLIOTT, FOXALL AND I WILL TRAVEL ON MONDAY 5 DECEMBER BY FLIGHT BA 888. PLEASE ARRANGE HOTEL ACCOMMODATION FOR NIGHTS OF 6 DECEMBER
TO 15 DECEMBER INCLUSIVE.
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