PSA Corp's debut $500 million international bond issue on Tuesday and S$600 million ($347 million) domestic bond deal on Friday mark the first debt financings by the AAA-/Aa1-rated port operator, as it seeks to restructure its balance sheet and ensure a more even capital mix before its flotation later in the fourth quarter. Following what the market is expecting to be a series of rapid-fire issues off the group's $2 billion medium-term note (MTN) programme, gearing should be built up from zero to 30% and shareholders' equity substantially reduced as deal proceeds are given back to the government in the form of a special dividend.
Says chief financial officer Grace Fu: "We have established an MTN programme and want to access as wide a market as possible. This is the first time we have tapped the debt markets, and in many respects we were also introducing Singapore to international investors for the first time. We hope that the success of our first international deal should pave the way for more to come."
As anticipated, the launch of the five-year international offering in New York on Tuesday under lead managers Morgan Stanley Dean Witter and JP Morgan proved extremely straightforward. As one of the co-managers puts it: "This was a nice, clean, tight deal run just the way you'd expect from a Singaporean quasi-governmental issuer. The leads basically ran the show and distributed bonds where they wanted to. It was the right strategy and we'd have done exactly the same."
Priced at par with a coupon of 7.125%, the August 2005 issue had a launch spread of 107bp over Treasuries, equating to 7bp over Libor. Co-managers were Citicorp, Credit Suisse First Boston, Development Bank of Singapore, Deutsche Bank, Merrill Lynch and UBS Warburg.
Setting the standard
"Other than the Asian Development Bank, this is the highest rated, most tightly priced international security to ever come out of non-Japan Asia," explains Morgan Stanley managing director Michael Dee. "It sets the standard for Singapore."
Distribution figures from the leads show that the deal followed a slightly different dynamic to its predecessor Singapore Power, which launched what has come to be regarded as Singapore Inc's first international debt benchmark in mid-April. The former anchored tight pricing by securing strong support from Singaporean accounts, then placing the balance in Europe and with a strong retail emphasis. Secondary market trading has been sparse.
PSA Corp, by contrast, was more evenly spread geographically and targeted the US for the first time. Indeed, the US accounted for the biggest take at 42%, followed by Asia with a 31% allocation and Europe 27%.
In total 60 accounts placed orders, with about 50 filled after hedge funds placing late orders were dropped from the book. Only one order, for $3 million, was a switch against Singapore Power, with the rest straight cash.
Where syndication strategy was concerned, bankers say that the main aim was to spread the net wide, but also anchor the deal with a couple of key accounts. Hence, although average ticket size was about $10 million, a couple of accounts that placed $50 million plus orders only received minimal scale back.
In immediate secondary market trading, the leads witnessed about $100 million trading between them, but believe that the deal has been firmly placed. "We had a phenomenal hit ratio from meetings with one-on-one accounts," comments JP Morgan's London-based syndicate head Jonathan Brown. "Of the 25 accounts we saw, 20 placed orders."
Attractive pricing
In terms of launch pricing, the deal came 1bp inside of the trading levels of Singapore Power, which was being quoted at 8bp over mid-swaps. Getting the deal away without the need for a new issue premium has largely been attributed to the fact that the transaction size was scaled back in order to get the right balance between aggressive pricing in the primary market and stable trading in the secondary.
Initially the group had been targeting an issue size of up to $1 billion and was thought likely to settle for about $750 million. "PSA thought $500 million would be a good threshold to get a liquid deal," Brown adds. "One of the things uppermost in their minds was to make sure that the deal performed well and trades in the secondary market."
For investors, one of the main attractions of the deal was its relative pricing to other triple-A and double-A rated credits. Most bankers agree that over time, PSA and Singapore Power should both tighten down to the trading levels of Japan's top government-guaranteed credits. "They have to head that way," Brown concludes. "In this instance, however, there was a need for a small new issuer premium and many investors also still insist on an Asian premium no matter who the issuer might be."
Japan Bank for International Cooperation (JBIC) and Japan Highway, for example, both have outstanding lines trading around Libor flat.
From the company's perspective, PSA is keen to bracket itself among the world's top corporate credits rather than other credits in its sector. Comments CFO Fu: "We really did have to explain who we were to investors. Many started out with the notion that operating a port is very much a blue-collar business. It's not. It is a brain business and one that makes intensive use of technology."
PSA is in fact the world's largest container transshipment hub and in 1999, a total of 15.9 million twenty-foot equivalent units passed through the port. Unmatched by any other in the sector, it has connections to over 500 container ports in 143 countries, through 124 container shipping lines.
Morgan Stanley's Michael Dee is also keen to emphasize that even during the Asian crisis, PSA continued to witness strong growth. "One of the things that surprised investors most is that PSA is a counter-cyclical credit to Asian growth," he explains. "It is far more attuned to world trade growth than Asian GDP growth."
Rating tied to gearing
In their rating assessments, all the agencies underlined that PSA's credit rating is not tied to its government ownership, but will remain fully deserved on a stand-alone basis as long as the company keeps its gearing ratios below the 30% level.
Fu outlines just how important this balance sheet strength is to the company. She says: "We are able to maintain very strong and sustainable cashflows even during an economic downturn. For the last two years, for instance, the figure has stood at about S$1 billion [$573 million]." As a result of the bond deal, she also adds, the company's debt to capitalization ratio has risen to 10%, while its return on equity [ROE] stands at 12.7%.
As the company continues to return proceeds from its bond issues to the government and shareholders' equity declines from its end 1999 level of S$6.4 billion, ROE is expected to improve further. Next in line is a domestic bond deal, which has been launched today under the dual lead of Citicorp and DBS.
Domestic deal priced
The S$600 million 10-year deal represents the largest unsecured transaction to date in the domestic corporate bond market and had been almost completely pre-sold before launch. This fact, however, meant that a slight controversy ensued when pricing was adjusted late last night to take into account sharp movements in swap spreads which followed government indications that interest rates may not be raised in the immediate future.
Initially, the deal was to have carried a coupon of 4.95% on an issue price of par, but to the annoyance of some investors, the figure has now been adjusted to 4.91%. "You can't really blame the company for wanting the change," says one banker. "Versus Libor flat, swaps have moved from 4.95% to 4.82%. This means that instead of the domestic deal being priced on a dollar equivalent basis at the high single digit level over Libor, the figure moved up into the teens."
"This made pricing look incredibly cheap next to the international deal wihch had only just been launched," the banker adds. "Some domestic accounts which would normally have just held deals like this, started asset swapping it to take advantage of the arbitrage."
Co-managers to the deal are Barclays, Deutsche Bank, HSBC and OUB.
Earlier this week, Singapore Power also appeared with a S$300 million transaction via Deutsche Bank. Priced at par, the three-year deal has a coupon of 3.95% with co-leads comprising Barclays Capital, Citicorp and DBS, alongside Fuji and UBS Warburg as co-managers.
