An increased $700 million 10-year tranche and $250 million 20-year tranche were priced during New York hours yesterday (Thursday) by lead managers Morgan Stanley and Salomon Smith Barney. The two re-openings follow a $2.73 billion three-tranche deal in March, which marked Asia's largest-ever corporate bond offering and bring the overall sizes of the 10- and 20-year tranches up to $2 billion and $1 billion respectively.
Pricing of the 10-year tranche came at 107.74% to yield 5.923% or 196bp over Treasuries. This was at the tight end of a revised 196bp to 198bp indicative range and flat to 2bp through the existing curve, which was hovering around the 197bp/195bp level.
Pricing of the 20-year tranche came at 104.313% to yield 7.452% or 255bp over Treasuries. Again this was at the tight end of a 255bp to 260bp indicative range and also came flat to the existing curve.
Similar to KDB last week, the deal was driven by US rather than Asian investors and there were consequently a high number of new investors in both tranches. Having launched the deal at Asia's open on Wednesday, the 10-year book closed two times oversubscribed at New York's open Thursday, while the 20-year was built on the back of reverse enquiry demand and had no set target.
With participation by 116 investors, there were 87 accounts in the 10-year tranche and 29 in the 20-year tranche. Observers estimate that new investors comprised roughly 50% of both tranches.
By geography the 10-year was split; 61% US, 21% Asia, 14% Europe and 4% other. By contrast in May, Asian investors were allocated 40%, US investors 40% and European investors 20%.
Where the 20-year was concerned, US investors took 85%, European investors 8% and Asian investors 7%. Last time round, US investors took 70%, with Asian and European investors on 15% each.
By investor type, the 10-year book was allocated; 28% banks, private banks and other, 23% funds, 22% insurance and pension funds, 19% investment advisors and 8% corporates. For the 20-year, investment advisors took 33%, mutual funds 23%, banks and other 19%, insurance and pension funds 15% and corporates 10%.
Bankers and analysts say that US investors in particular are looking to diversify away from domestic corporate credits and want sovereign or semi-sovereign names of A ratings or higher, that can offer stability and safety, but also some yield pick-up over the supranationals and agencies. Petronas also fits the bill in other ways as its large-scale bonds are highly liquid, while the credit characteristics of its cash rich balance sheet and utility status highlight its attractiveness as a haven in volatile markets.
The participation of large numbers of new investors should also go some way to allay concerns about supply pressures on secondary market spreads. In the run-up to the re-opening, which has been rumoured for over a month, the differential between Petronas and the sovereign has been widening.
Back in May, Petronas priced the 10-year at a 15bp premium to the sovereign on a like-for-like basis. At that point in time, it also had a one-notch higher rating of Baa1 from Moody's compared to the sovereign's Baa2 level. This time round, Petronas came at a roughly 27bp premium to the sovereign, whose July 2011 bond was trading at 159/155bp at Asia's close Thursday. Both credits now have the same BBB+/Baa1 rating and most market participants believe Petronas will not re-pierce the sovereign ceiling over the near-term.
In spread terms, pricing has come wider than May, but in yield terms it has come tighter in a reflection of US interest rate cuts. The 10-year was originally priced at 99.837% on a coupon of 7% to yield 7.023% or 175bp over Treasuries. The 20-year was priced at 99.532% on a coupon of 7.875% to yield 7.922% or 218bp over Treasuries.
Proceeds from the original bond deal were used to fund the company's investments in Chad and finance a third LNG facility. During a conference call earlier this week, chairman Tan Sri Hassan Marican said the company had earmarked a further $1 billion to $1.5 billion of capital expenditure through to the year-end in March and would either fund the amount through new debt or internal cash flow.
He also stated that the company would continue to hold at least $6 billion in cash and liquid assets. Bankers say the company currently has $11.5 billion. At the same time, he said that the ratio of debt funding to company assets would increase marginally from 27% to 33%.
Lead bankers believe Petronas has timed its new bond issue to perfection since 10-year Treasuries crept back past 4% again after pricing, while the company was able to lock-in a 3.963% level. Others note that while Petronas has once again shown its willingness and ability to react quickly to a market window, the Kingdom of Thailand chose earlier this week to ignore one, or more precisely run away yet again.
And as one banker concludes, "Petronas never fails to get it right. What a great way to help round off the year and consolidate its standing as Asia's borrower of 2002."
