The successful debut of an inaugural bond issue from Cambodia this week demonstrates that even the most unusual credits can clear volatile and difficult markets if they are prepared to pay a price investors feel comfortable with.
It is an attitude which meant that a $300 million three-year non-call two-year bond issue for Cambodian casino operator NagaCorp traded up over one point between its pricing on Monday and the close of trading in Asia on Wednesday.
This positive secondary market performance provides a sharp contrast to almost every single Asian G3 bond deal which has come to the market over the past month or so. One reason why is because NagaCorp’s B1/B rated bond is illustrative of a classic emerging or frontier market trade, which is placed almost entirely with institutional and frontier market investors.
By contrast, the recent flood of Chinese property issuers have leveraged their commercial banking relationships to the hilt; force-feeding them paper in the hope of keeping their funding costs down.
While this strategy might seem to benefit issuers over the short-term, it has actually done the reverse. Spreads have widened across the board as unwilling buyers dump bonds once deals break syndicate, putting pressure on the whole market and making it more difficult for the next issuer in the pipeline.
NagaCorp has been also affected by the fallout given investors partially benchmarked it against single-B Chinese property names such as Fantasia whose three-year paper is now yielding in the high 9% range.
Had this spread widening not occurred, it is entirely possible the Reg S/144a deal could have been priced a lot closer to other Asian gaming credits. Had it also not had to contend with wider emerging market volatility, the group might have been able to structure the five-year transaction it would have preferred as well.
In the equity markets, for example, Hong Kong-listed NagaCorp typically averages a 40% valuation discount to Macau-based peers such as Hong Kong-listed Wynn Macau.
In the bond markets, this translates to a yield around the high 7% mark based on the 5.6% yield of Wynn Macau’s 4.875% October 2024 bond. Instead, the deal was priced at 99.362% on a coupon of 9.375% to yield 9.625%.
Comparable sovereign credits to Cambodia are trading at much tighter levels too. Examples include B1/B+ rated Belarus, which has three-year paper around the 6% level.
However, one of the greatest challenges facing lead managers Credit Suisse and Morgan Stanley was how to price Cambodian credit risk given the complete vacuum, which exists where both the country’s international and domestic bond market standing is concerned.
The Kingdom of Cambodia does not even issue government securities, although in a recent research paper the Asian Development Bank pointed out that it planned to begin doing so from early 2019. There is also no domestic corporate bond market, although again, the government issued the legislative framework for one last summer.
As one banker commented: “It’s normally the sovereign, which sets the benchmark for a country. But in this case NagaCorp has done it.
“Its business is a no-brainer,” the banker added. “So for investors it was all about the right risk premium for the country.”
And risk is certainly the right word to attach to Cambodia, which is about to face a general election in June this year. The country ranks very poorly in any indices relating to governance and corruption. Transparency International ranks it 156 out of 176 countries, sandwiched between Zimbabwe and the Democratic Republic of Congo.
It also ranks very low in the Press Freedom Index thanks to the efforts of long-standing Prime Minister Hun Sen to stamp out his remaining critics following the opposition Cambodia National Rescue Party’s success in municipal elections last June. Since then, the party has been disbanded and its leader jailed.
Meanwhile 30 radio stations, including Voice of America, have been shut down, while two leading English language newspapers have either been forced out of business, or sold to friendly parties.
HALF MAN HALF BEAST
NagaCorp itself is something of a hybrid credit, much like its namesake – the half snake, half human seven-headed Nagas, which guard Cambodian temple complexes.
The company’s founder, Chen Lip Keong, is from Malaysia. The stock is listed in Hong Kong and all of its revenues are denominated in US dollars. In many ways it is not Cambodian at all.
Nearly all of the patrons of its Naga1 and Naga2 entertainment complexes are non-Cambodian too. According to a recent research report by Morgan Stanley, up to 60% of its mass gamblers are from China, South East Asia, Korea and Japan. The rest are nearly all expats, or people on business trips to Phnom Penh.
Yet while the customers are foreign, the group’s revenues are nearly all generated in Cambodia, making it a clear proxy for the country’s credit and the concentration risk that comes with it.
In 2017, NagaCorp recorded sales of $956 million. In the same year, its gross gaming revenue (GGR) accounted for a hefty 4.16% of Cambodia’s GDP compared to the sector’s 0.96% ratio in the Philippines.
The government is starting to tap into that windfall with taxes likely to rise from 2% to 5% later this year, although as analysts point out this is still a significantly lower than Macau where taxes account for 39% of GGR.
From a balance sheet perspective, NagaCorp does not suffer any of the risks associated with a typical single-B rated credit. Its bond deal marks its first debt financing, giving it a very healthy pro-forma debt-to-Ebitda ratio of about one times. In its rating release, Standard & Poor’s says it does not expect this to rise above 2.5 times.
It also enjoys the kind of monopoly status more typically enjoyed by a utility, subject to political risk factors. As a result, the group typically pays out about 60% of its net profit as dividends and enjoys a monopoly on gaming licences in a 200km radius of the capital through to 2035. Its own license expires in 2065.
There is also no cap on the number of tables it can provide and it plans to expand the number from 384 at the end of 2017 to 564 by the end of 2018. The company is using $150 million of the proceeds to refurbish Naga1, with the rests set to sit on its balance sheet to boost its cash balance.
Bankers said that many of the investors which participated in the deal brought their equity analysts with them to roadshow presentations since the group is well known in the stock market. This meant the credit work was less arduous than a typical debut frontier market deal and resulted in a $450 million peak order book, which included investors that now hold the company’s equity and its debt.
Distribution stats show that 47 investors participated in total, with a split, which saw 90% placed to fund managers, 9% to banks/securities houses and 1% to private banks. By geography, 63% went to Asia, 22% to the US and 15% to EMEA.
