After a lengthy absence from the international bond markets, the Malaysian oil company returned in some style yesterday (Wednesday) with Asia's largest ever corporate bond offering and the region's second ever largest offering behind the Republic of Korea's $4 billion issue.
The success and size of the $2.73 billion three-tranche transaction also means that the deal is likely to provide investors with a second liquid proxy to play Asia alongside the Federation of Malaysia's benchmark 2011 issue.
Pricing of the three tranches, which will re-fill the Baa1/BBB rated credit's yield curve, came at the tightest end of the final indicative range. Under the lead of global co-ordinator Morgan Stanley and bookrunner Salomon Smith Barney, a $1.3 billion ten-year US dollar tranche was increased from $1 billion and priced at 99.837% on a coupon of 7% to yield 7.023% or 175bp over Treasuries. Alongside it came the surprise late addition of a $750 million 20-year dollar tranche, which was priced at 99.532% on a coupon of 7.875% to yield 7.922% or 218bp over Treasuries.
Again under the lead of Morgan Stanley with Barclays and HSBC as joint-bookrunners, an Eu750 million seven-year tranche was increased by Eu250 million and priced at 99.561% on a coupon of 6.375% to yield 6.455% or 115bp over mid-swaps. This represents an equivalent Treasury spread of about 168bp.
Observers reported a global order book of over 500 investors and $8.44 billion in demand, with the euro book closing 0.7 times oversubscribed, the 10-year dollar three times oversubscribed and the 20-year dollar about two times oversubscribed.
In terms of geographical splits, observers report that one of the most interesting facets of the euro deal was the demand generated from Asia, which has not traditionally been that strong a player in the euro sector. By allocation, there was said to be an even split between the region and Europe, although by demand Asia was said to have a slight edge with orders for 53% of the total.
By investor type, banks predominated in Asia, with a strong showing by the private banking sector where 20 different accounts participated. In Europe, by contrast funds predominated. Observers also said that because there was said to be little padding in the book, there was an average allocation of 75%.
In the US dollar tranches, there was also an even geographical split in the 10-year tranche where allocations came in a 40% Asia, 40% US and 20% Europe. Where the 20-year is concerned, US investors accounted for about 70% of the total, with the balance evenly split between Europe and Asia.
The late inclusion of a 20-year tranche has widely been deemed a smart strategic move by Petronas and the company followed a clever policy of not making its intentions known at the outset and letting US investors gain too much leverage that would have pushed pricing out too wide relative to the new 10-year.
For many investors, key to the pricing was where the deal came relative to the sovereign and the deal's large size did necessitate a slight new issue premium. Traditionally semi-sovereign Asian credits tend to trade about 20bp wide of their respective sovereigns, but Petronas has previously been able to completely close the gap because it has a one-notch higher rating than the sovereign from Moody's.
In this instance, the 10-year dollar tranche came about 15bp wide of the Malaysia 2011 on a like-for-like basis. The Federation's 7.5% July 2011 bond was bid at 104.93% at yesterday's close in Asia to yield 6.77% or 149bp over Treasuries. Between nine and 10-years, there is also about 10bp on the curve.
The seven-year euro priced wider relative to sovereign dollar paper, although this has always been fairly standard practise and most borrowers primarily regard the euro zone as an opportunity to diversity their investor base. The Malaysia sovereign 8.75% June 2009, for example, was bid at 113.06% yesterday to yield 6.41% or 113bp over Treasuries.
In terms of its own curve, Petronas also appears to have priced tight to its outstanding 2015 issue and wide to its 2025 issue in a reflection of the greater pricing power of US investors. At the time of pricing its 7.75% August 2015 issue was bid at 104.48% to yield 7.22% or 194bp over Treasuries. The new 2012 bond has, therefore, come 19.7bp wider on a yield basis equating to 6.56bp per annum.
The 7.63% October 2026, on the other hand, was bid at 98% to yield 7.81% or 207bp over Treasuries. Despite the fact that the 2022 issue has a four-year shorter maturity, it has priced 11.2bp wider in yield terms.
Most market participants believe that Petronas has timed its deal well, locking in low cost borrowing and followed a sensible strategy of setting out with a small issue size and then upsizing the deal once the market settled down and came to terms with the new supply. Initial fears that it might swamp the market proved unfounded and although Malaysian sovereign spreads have moved out 6bp since the beginning of the month, analysts argue that they are likely to come in again once investors realise that there is not a lengthy new issuance pipeline behind the new deal.
Proceeds add to Petronas's already sizeable $11 billion cash pile and the company consistently maintains prudent gearing ratios. At the end of 2001, for example, it had a debt to assets ratio of 30% and an EBITDA interest coverage ratio of 11.2 times. On a stand-alone basis, analysts agree that the company deserves a higher rating, but has been capped by its close relationship with the sovereign, which effectively controls all of its investment decisions and deployment of cash reserves through its appointment of the board.
However, despite its symbiotic relationship with a government for whom it provides about 20% of the annual budget through taxes and dividends, the company is increasingly being viewed as a global rather than domestic oil player. At the end of 2001, 31% of its total revenues came from its international operations, which span E&P projects in 14 different countries, of which 40% are based in Asia and 60% in Africa and the Middle East.
The strategy and subsequent success of Petronas's new offering should expunge painful memories of its last foray to the international markets in the summer of 1999, when it was unlucky enough to hit a patch of extreme market volatility and had to considerably downsize its expectations.
For lead managers, the deal is also likely to have been extremely satisfying since fees have been normalized, with the seven-year paying 40bp, the 10-year 45bp and the 20-year 87.5bp.
