Singapore Telecommunications (SingTel) returned to the international bond markets for the first time in three years on Tuesday with a $500 million deal that was timed to take advantage of a brief respite from the volatility generated by Greece's debt negotiations.
The deal hit a sweet spot in the market, not only because of its timing but also because it had a 10-year tenor – the point of the curve where sales desks were reporting the most buying activity in the secondary market on Tuesday.
Under the lead of Citi, HSBC, Mizuho and Morgan Stanley, Aa3/A+ rated SingTel priced a $500 million Reg S offering at 98.863% on a coupon of 3.25% to yield 3.385% or 97.5bp over Treasuries. This was 12.5bp inside of initial guidance around the 110bp level, which was subsequently tightened to 2.5bp either side of 100bp.
"Our ultimate aim was to settle somewhere between 95bp and 100bp so this was a successful outcome," said one source close to the deal.
SingTel also learned a valuable lesson from its last bond outing in March 2012 when it went out with initial guidance only 5bp away from where it hoped to price. This time round it gave the leads space to build momentum, which helped generate a final order book of $$1.35 billion.
About 116 accounts participated in the offering, which had a split of 76% Asia and 26% Europe. By investor type, banks took about 58% and fund managers 34%, with the balance allocated to private banks and insurance funds.
Bankers estimate the deal priced flat to potentially 2.5bp back from fair value. SingTel has a 4.5% September 2021 bond outstanding, which was trading on Tuesday at a G-spread of 77bp/78bp over Treasuries. One banker calculated that this equates to about 72bp/73bp over Treasuries on a five-year basis with an additional 25bp to account for the leap from 5 to 10-years down the curve.
The deal has also come about 30bp back from its majority shareholder Temasek, which has a 2.375% January 2023 bond outstanding. This was trading yesterday on a G-spread of 61bp over Treasuries, with bankers adding a further 6bp to stretch it out to 10-years.
The other comparable investors were given to look at was Australian telco Telstra, since SingTel derives nearly one third of its free cash flow from Australia through its ownership of Optus.
Telstra is rated two notches lower by Moody's and one notch lower by Standard & Poor's at A2/A. It has a 3.125% April 2025 bond outstanding, which was trading on Tuesday at a mid G-spread of 111bp over Treasuries.
Weaker credit profile
On the plus side, SingTel's deal should benefit from rarity value. It is not a frequent issuer and other sovereign-linked entities have been thin on the ground from the Lion City over the past year.
The high ratings and perceived stability of Singaporean credit also means they tend to be seen as safe havens when markets are buffeted by volatility.
In its ratings release, Moody's also said proceeds were being used to re-finance existing debt, which is credit positive.
However, it added that SingTel is flirting with the high end of its tolerance where net debt to Ebitda is concerned. It downgraded the group from Aa2 to Aa3 in 2012 after it breached 1.5 times and said it now expects SingTel to reach 1.75 to 1.8 times due to its $810 million acquisition of US cyber security firm Trustwave.
But even if it does put SingTel on review for a potential downgrade, this will only bring its rating in line with Standard & Poor's, which is already one notch lower.
SingTel has guided for higher accrued capex of S$3 billion ($2.24 billion) during the 2016 financial year as it seeks to invest in a new Singapore-based data centre, enhance its 4G coverage in Australia and launch a new unified billing and customer care system. About S$1 billion of this capex will be directed to Singapore and S$1.9 billion to Australia.
In its marketing presentation to investors, SingTel says that Singapore accounted for 39% of its free cash flow mix in 2015, with Australia on 30% and dividends from associates accounting for the remaining 31%. Free cash flow rose 9% year-on-year to S$3.75 billion.
These associates have become an important component of SingTel's earnings following an acquisition spree across Asia, which means that it now owns: 32% of India's largest operator Bharti Airtel; 35% of Indonesia's largest operator Telkomsel; 23% of Thailand's largest AIS and 47% of the Philippines' second largest, Globe.
The most important revenue wise is Bharti Airtel, which passed through S$1.66 billion to SingTel in 2015 compared to S$1.29 billion for the rest put together.
SingTel said that net debt stood at S$8 billion as of March, equating to a gearing ratio of 24.3%. Both these levels have been fairly constant since 2012.
