Asian sovereigns shine

The huge wash of liquidity that has propelled every recent Asian bond deal from Sing Tel to CNOOC has never been more evident than at the pricing of two new sovereign dollar benchmarks in New York last night (Tuesday).

Pricing of a $750 million re-opening of the Federation of Malaysia's July 2011 bond at 6.8% and a $1 billion transaction for the Republic of the Philippines at 8.5% represent the lowest borrowing costs that either issuer has ever secured for a benchmark dollar offering. Both deals were underpinned by huge order books in terms of overall size and number of investors participating. Both deals consequently priced more tightly than expected after taking full advantage of secondary market momentum generated by ratings changes. And after an uneven track record in the international bond markets in recent years, both sovereigns were able to complete their major fundraisings for 2002 basking in the glow of an unequivocal success.

As one participant comments, "For any prospective Asian capital markets issuer, the bond market is where you want to be at the moment. There's no loan growth and generally few assets for banks to purchase. Investors are also still very wary of equity and they want yield."

A second adds, "March is always usually a strong month for primary market issuance because investors have coupon payments to re-invest. It's still close to the beginning of the year and funds have plenty of cash to put to work."

After simultaneously and formally opening for business after Asia's close on Monday, Malaysia had amassed a clean order book of $3.6 billion by the next day and the Philippines an order book of $2.9 billion. Both deals had very similar distribution patterns and unusually the US was the key driver, accounting for 50% of distribution.

This was less surprising in the case of the Philippines since it has been the most obvious beneficiary of a strong flow of funds from Latin America to Asia following Mexico's upgrade to full investment grade status a few weeks ago.

Having traded out past the 600bp level just over half a year ago, the BB+/Ba1-rated Republic has seen spread levels halve since then, with 50bp of the tightening occurring over the past week alone. News of the new deal could have caused spreads to back up equally quickly, but as the strength of the order book became clear, the reverse happened and the existing benchmark 2010 issue closed trading in Asia Tuesday at 363bp bid, 20bp tighter than the night before. 

With HSBC as global co-ordinator alongside Deutsche Bank and JPMorgan as joint bookrunners, the Republic increased a prospective $700 million seven year deal to the $1 billion mark, making the deal the sovereign's largest single tranche issue to date. Pricing came in at 99.351% on a coupon of 8.375% to yield 8.5% or 344bp over Treasuries. At this level, it came about 12bp over the sovereign's interpolated curve.

There were also four co-managers each taking 1% of the 32.5bp fees, but no bonds. They were Bear Stearns, Credit Suisse First Boston, Goldman Sachs and Morgan Stanley.

Observers report that throughout the 24 hour marketing period demand was led by the US, although Asia caught up over Tuesday to close at $1.25 billion, with the US also on roughly $1.25 billion and Europe about $500 million. In terms of distribution, there were a total of 250 accounts, of which 50% came from the US, 31% from Asia and 19% from Europe.

One of the most notable highlights of the deal was the participation of crossover funds, again particularly from the US where they were said to dominate the order book. Globally, observers conclude that there was probably a 60%/40% split in favour of emerging market funds. And unlike Malaysia, where there were a sizeable number of jumbo orders, the Philippines deal was characterized by lots of orders in the $10 million to $25 million range.

Proceeds from the deal will initially be retained by the Department of Finance, with a portion of the amount likely to be on-lent to Napocor at some point in the near future. Country experts believe that by raising funds in its own name, rather than letting the power utility close a $500 million deal three weeks ago at a yield of 9.5%, the sovereign has saved the country about $75 million.

They also emphasize that the Republic is unlikely to return to the international bond markets for sizeable funding until the end of the year when it might decide to pre-fund a portion of the 2003 budget deficit. In the interim period, most expect it to return to smaller, structured trades, particularly if it decides to raise the $300 million Napocor is still said to need. In its absence, however, the central bank may take up the slack, with analysts calculating a funding need of about $1.5 billion.

For many investors, a key question will be how much further Philippines spreads can realistically be expected to tighten from here. While many were surprised when Moody's changed its outlook from stable to positive in February, most are now expecting Standard & Poor's to remove its negative outlook after its current review. The jump to investment grade status, however, remains some way off.

Where Malaysia is concerned, analysts generally concur that the sovereign and quasi-sovereign benchmarks such as Petronas and Telekom Malaysia still have some way further to tighten. Indeed, many houses have recently made the country their top pick as a result of the combination of improved economic outlook and lagging spread performance.

Even so, being able to secure the re-opening at only a 3bp premium to secondary levels was a highly impressive feat and the tightest yet of the sovereign's three re-openings to date. Cleverly the deal was also timed to coincide with the announcement that Standard & Poor's was changing its outlook from stable to positive and the sovereign was able to successfully ride the secondary market tightening which ensued. 

Consequently, having seen the $1 billion 7.5% July 2011 deal close Friday's trading in Asia at 180bp bid, it was down to 175bp bid by the time the deal priced, although one participant noted a trade as low as 166bp bid.

With Morgan Stanley and UBS Warburg as lead managers, the 2011 bond was re-opened at 104.769% to yield 6.8% or 172bp over Treasuries. Fees totaled 35bp, not 25bp as incorrectly reported on Monday and there was no other syndicate.

With a total deal size of $1.75 billion, the deal marks Asia's most liquid sovereign benchmark and as such attracted a high quality order book where 10 orders alone accounted for over $1 billion of demand. Final allocations were split 48% US, 26% Asia and 26% Europe, with no one account being allocated more than 3.5% of the deal (about $25 million) and most cut back to between 0.1% and 0.3% ($750,000 to $2.25 million).

By investor type, asset managers took 27%, banks 18%, funds 33%, insurance companies 17% and private banking 5%.

Traditionally, most commentators have benchmarked Malaysia's trading levels against those of the Korean sovereign and in particular its April 2008 issue. Currently, the differential between the Baa2/BBB+ rated Korea 08 and Baa2/BBB rated Malaysia 09 is about 75bp, roughly where it has been for the past year-and-a-half. Some bankers, however, are beginning to argue that since virtually all of the Korean sovereign issue has been asset swapped back to the home market, the comparison between the two is becoming meaningless. 

Instead supporters tend to emphasize the consistent flow of positive information coming from Malaysia, both in terms of economic forecasts and efforts to present a more palatable international image. At the end of 2001, for example, the Corporate Debt Restructuring Committee (CDRC) achieved its target of completing 14 large cases and has been very vocal in publicizing its achievements.