PTT, Thailand's largest integrated petroleum company, made its bond market debut on Thursday pricing a $400 million 10-year deal via Citigroup, Deutsche Bank and JPMorgan. The Baa1/BBB sovereign rated deal was priced at 99.121% on a coupon of 5.75% to yield 5.867%. This equated to 138bp over Treasuries, or 90bp over Libor.
However, the stand-out aspect of the transaction was the unprecedented tightening it experienced once it broke syndicate. Unsurprisingly non-syndicate banks concluded the deal had been misspriced after it contracted 16bp to a bid level of 122bp during Asian trading hours on Friday.
This rapid squeeze followed severe scale backs in allocations after the order book closed seven times covered around the $2.8 billion level. About 150 accounts are said to have participated, with a geographical split of 40% US, 35% Asia and 25% Europe. By investor type, asset managers took 45%, banks 32%, insurance funds 18% and retail 5%.
A few non-syndicate bankers had some sympathy for the lead managers since Thai deals are notoriously difficult to price. Since the financial crisis, there have only been two "phantom" bond deals by the sovereign, both of which were so tightly priced they had to be pushed into friendly banks to get done.
The sovereign's recent $1 billion three-year FRN in early May, for example, was priced at 13.5bp over Libor.
PTT appears to have experienced the opposite problem. Like a number of Asian bond deals this year it built up a huge order book. But unlike all other Asian bond deals, pricing support carried through to the secondary market rather than evaporated.
But the main error appears to have been an under-estimation of the bond's rarity value. Compared to similarly rated credits, pricing seemed about right.
The main comparable was Malaysian oil company Petronas, which has an A-/A3 rating, one-notch higher than PTT on the Moody's side and two notches higher from Standard & Poor's. The group has a 7.75% August 2015 bond outstanding, which was trading around 138bp bid on Thursday.
Given that the Treasury curve is worth about 10bp on a like-for-like basis, PTT priced about 10bp through its higher rated comparable.
Proceeds are being used to re-finance up to Bt50 billion ($1.3 billion) of debt while interest rates remain low. Over the next five years, the group has a $7 billion capex plan to build a third gas pipeline, construct a gas transmission plant and expand its downstream petrochemical operations. But it has also previously said that the entire amount can be funded entirely through cash flow.
At the time of its IPO, the company pledged to reduce its gearing from 123% in 2001 to 100% by 2004. By the end of 2003 it had beaten the most aggressive of assumptions, with net debt to equity falling to 48%.
