In an environment of low US Treasury yields and an all-round benign market backdrop, it is an ideal time for high-quality issuers to come to market. Temasek’s wholly owned shipping company, PSA International (PSA), fit that description well, pricing a $500 million bond issue on Wednesday.
PSA last accessed the market back in September 2009. The new issue offered a strong scarcity value for investors and attracted $2.2 billion of orders from 180 accounts.
The Regulation-S notes were assigned an Aaa rating by Moody’s and AAA rating by Standard and Poor's. They pay a fixed rate 3.875% semi-annual coupon, and were re-offered at 99.684 to yield 3.912%. That was the equivalent of 100bp over the yield of the 10-year Treasury note. The notes hold a maturity date of February 11, 2021.
In an effort to build a smoother maturity profile, PSA opted for a 10.5 year issue as opposed to a straight 10-year.
“An issuer like PSA can get away with a slightly longer maturity and achieve pretty much similar pricing for a 10-year bullet,” said one source familiar with the trade.
Given the nature of PSA’s operations, there weren’t a lot of direct comparables for investors to use as a gauge for relative value.
The PSA bonds were offered at an attractive yield premium to ST Engineering’s 2019 bonds, which were trading at 90bp over Treasuries. Temasek’s 2019 bonds were trading lower at 80bp. PSA’s illiquid 2019 bonds were quoted at Treasuries plus 88bp.
Nevertheless, the secondary curve was still referenced. Lead managers -- Barclays, Credit Suisse and Goldman Sachs -- reckoned that fair value for the new bonds would be around 105bp over US Treasuries.
Based on this, the borrower went out with formal guidance of 105bp plus or minus 5bp. In the end, the bonds priced in the middle of the range at 100bp over the 10-year Treasury yield. During the Asian trading session yesterday, they remained relatively stable at the re-offer level before widening to 104bp at the end of the day as the market weakened over all.
US Treasury yields are at historically low levels, so borrowers have been keen to take advantage.
"And, investors are less concerned about relative credit spreads, but are keen to lock in to absolute yields paid by top-quality issuers,” said one banker.
Clearly, there is strong demand for issues launched by top Asian borrowers. PSA’s issue was 4.4 times subscribed.
In terms of regional allocation, 56% of the bonds were sold into Asia, 26% to Europe and offshore US accounts received 18%. Asset managers bought 55% of the bonds, banks took 21%, private banks 20%, insurance and pension funds 2% and other types of accounts made up the remaining 2%.
The notes were issued as part of PSA’s $3.5 million medium-term note programme, of which the proceeds of the sale will go towards general operating purposes. As one source noted, the $500 million issue size itself is not a significant amount for PSA, but given the current interest rate environment, it was a good opportunity for the borrower to tap solid long-term funding at a very low yield.
Deal pipeline
Elsewhere, Union Bank of India has priced a $400 million five-and-a-half year deal. The arrangers were Barclays, Citi, Deutsche Bank, Standard Chartered Bank and UBS.
Country Garden, Land Bank of the Philippines, Olam International and Renhe Commercial Holdings Company have each announced their intentions to issue dollar bonds this summer.
Country Garden has hired J.P. Morgan and Goldman Sachs. It is expected that the China property company will print a five-year deal with an issue size between $300 million and $400 million.
Land Bank of the Philippines has hired Citi and Deutsche Bank to manage the sale of its expected hybrid tier-1 debt. The issue size is expected to be between $100 million and $120 million.
Malaysia’s Olam International said that HSBC and J.P. Morgan will be joint lead managers for its upcoming transaction. While Renhe has announced that it has mandated Bank of America Merrill Lynch, Bank of China International and UBS as arrangers for its upcoming investor roadshow.
