Singapore Telecommunication's S$1 billion ($575 million) deal has broken new ground in both the domestic bond market, where it ranks as the largest offering by a long mile, and against international comparables, where only DBS has raised more money from the straight debt markets with its first $750 million sub debt deal. The five-year transaction also effectively marks SingTel's debt capital markets debut and its first step towards building gearing from 1.1% as at end FY1999 towards a mid-term goal around the 30% level.
Launched yesterday (Monday), the deal has, nevertheless, attracted an equal measure of praise or criticism, depending on which side of the syndicate fence a particular bank was sitting. While syndicate members describe the deal as fairly priced and easy to place, non-syndicate bankers claim that the combined effect of the deal's large size and aggressive pricing will leave much of the paper sitting on the leads' books.
Led by DBS, with Citicorp as co-lead and BNP Paribas, Deutsche Bank and Standard Chartered as co-managers, the par-priced offering was launched with a semi-annual coupon of 3.21% to yield about 23bp over Singapore Government Securities, or 2bp over the mid-swap rate. Fully underwritten, the three co-managers took S$100 million each on their books and Citicorp just over $200 million.
Against secondary pricing levels, the deal was certainly very aggressive. At the time of pricing, a recent seven-year by the Housing Development Board (HDB) was said to be trading at about 3.27%, or 8bp over mid swaps. "It's totally out of whack to price a government-linked company through the secondary trading levels of a Statutory Board," comments one local player. "It should come at a premium."
Non-syndicate bankers also say that they were not keen to participate because they would have had to underwrite huge chunks of paper without being compensated with extra fees or league table accreditation. "Euromarket practice would see the co-manager group typically taking about 10% to 15% of deal, not the 40% that DBS was trying to get away," he continues.
A second also adds: "We thought long and hard about going in and would have done so for relationship reasons had the deal been half the size. But since it was priced through where we thought we could sell it, we decided we had no other option, since we're not in the market to put deals like this straight on our balance sheet."
Lead bankers, on the other hand, point to the recent pricing levels of primary deals in the Singapore market. As one notes: "Secondary spreads are not a good pricing benchmark. When HDB did its recent seven-year deal, it came at swaps flat against the then trading levels of other Stat boards at around 8bp over. So too, PSA came at 2bp over last year when it did it's debut 10-year deal.
"This kind of reversal is quite a normal phenomenon," the banker continues. "Ford Motor's domestic 2004 bond, for example, is also trading about 30bp cheap to where it should be against dollar outstandings."
Bankers add that exceptionally thin liquidity in Singapore's secondary market continues to remain the main reason why it provides an unreliable gauge. "Because investors can't access the secondary market in any size, many prefer to participate in the primary and this is why it's possible to achieve these kind of tight pricing levels," a second banker argues.
"There is a lot of liquidity in the domestic banking system at the moment and we expect local banks to participate in this deal in size. We're very confident about placing out paper."
Bankers also believe that the Monetary Authority of Singapore's (MAS) moves last week to further liberalize the market should also have a beneficial impact by encouraging greater participation from overseas investors. Officials announced the lifting of restrictions on the participation of offshore banks in the Singapore dollar swap market and the lifting of requirements on domestic banks to set aside reserve for Singapore-dollar swap transactions of less than one year's maturity with non-bank financial institutions and corporates.
As a result, lead bankers believe that up to 20% of the deal may be placed offshore. Compared to the current dollar trading levels of Singapore Power and PSA Corp, all agree that the deal is attractive. Launched at a dollar-Libor level of 9bp over, SingTel's offering is said to have come a couple of basis points through the current bid level of Singapore Power's April 2005 transaction.
In a declining interest rate environment, the deal also makes perfect sense for SingTel, which has started the process of gearing itself up from an attractive base. As of year end March 2000, the company only had S$100 million of debt on its balance sheet, compared to shareholders' equity of S$9 billion, a debt to equity ratio of only 1.1%. At these levels, therefore, the company had an interest coverage ratio of over 100 times EBITDA.
As a result of the new deal, gearing has been boosted to the 11.1% level and analysts say that it will have a positive impact on the company's Return on Equity (ROE). Many argue that the latter will decline from current 21% levels as the company's operating margins (70.2% in FY99) shrink with increasing competition in the domestic telecoms market.
SingTel has responded by expanding its international portfolio (currently $2.9 billion) and will use proceeds from the new deal to complement its S$6 billion cash war chest. Earlier this month, the company announced that it had made an initial offer to purchase some or all of Australia's Cable & Wireless Optus in a three-way battle with Vodafone plc and Telecom Corp of New Zealand.
Analysts also believe the company is in advanced discussions with British Telecom to purchase its Asian assets including a 20% stake in Hong Kong's SmarTone Telecommunications and at a more preliminary stage, it's 33% stake in Maxis, Malaysia's second largest cellular operator. Similar to previous efforts to purchase Time.com, however, analysts say that the latter acquisition is fraught with political sensitivities.
"Because SingTel lost its bid to get Time and PCCW, there is some concern that it might be overzealous in paying for new acquisitions and that could have a detrimental effect on its balance sheet once cash reserves get eaten up," one concludes. "How SingTel positions itself as a pan-Asian telco will be critical. Yet despite the fact that the company does not have majority stakes in investments like Thailand's AIS and Globe Telecom of the Philippines, it has still made very good returns."
