SMC Global Power, the Philippines’ largest power producer, jumped into the Asian bond markets on Wednesday with its first perpetual deal since 2013.
The transaction came one day after a similar offering from the Philippines International Container Terminal Services (ICTSI), which initially appeared to have gone well after attracting a respectable order book of $1.8 billion for an upsized $450 million offering.
However, instead of providing a good springboard for SMC Power, ICTSI’s deal appears to have sucked most of the available demand out of the market instead.
As a result, SMC Power ended up having to settle for a $300 million issue size when it had been marketing a transaction of up to $500 million. Unusually, pricing was also not tightened from initial indications around the 6.75% level, although the leads did try to push it down to 6.625% when revised guidance was released during Asia's afternoon.
After only being able to amass an order book around the $600 million level, the syndicate fixed final pricing at par on a coupon of 6.75%. According to a term sheet seen by FinanceAsia, the subordinated Reg S deal has a perpetual non-call 5.5-year structure, with a coupon that steps up by 250bp at the first call date in February 2021.
The group’s existing 7.5% subordinated perpetual has a call option in November 2019 and was trading on a yield-to-call of 5.933% on Wednesday. This means the new deal has offered a hefty 81.7bp premium over the group’s outstanding paper in return for a 1.3-year maturity extension.
By contrast, ICTSI’s own new 5.5% senior perpetual deal was priced at a 59.5bp premium to its outstanding paper on Tuesday. It offered a two-year maturity extension from a May 2019 call date to a May 2021 call date.
"This deal has been a victim of poor equity markets," one fund manager reflected after the deal had priced. "Investors need to feel comfortable there's a buffer of a least one point of upside when markets are as volatile as this."
Fair value
The new SMC Power bond deal may have received a poor reception in the primary market, but its attractive pricing may mean it trades well in the secondary market if wider credits spreads hold steady.
Ahead of pricing, analysts at Nomura estimated fair value at 6.15% to 6.25%, some 50bp to 60bp inside of final pricing.
Based on this analysis the 6.75% re-offer yield appears to offer a lot of upside. However, when comparisons are made between the secondary levels of ICTSI and SMC Power’s outstanding perpetual deals, the new issue premium appears to be along the lines of 30bp to 40bp.
For example, ICTSI’s senior 6.25% May 2019 callable deal was trading Wednesday on a yield-to-call of 4.88%. SMC Power’s subordinated 7.5% November 2019 callable deal was trading at 5.933%.
This means SMC was trading at a 105.3bp premium over ICTSI on paper, which has six-months extra duration.
SMC Power’s new subordinated deal is three months shorter than ICTSI’s new perpetual. It has been priced at a 135bp premium based on ICTSI’s closing yield of 5.933%.
ICTSI's new deal hugged its re-offer price throughout the Asian trading day on Wednesday. Indeed, sales desks reported little movement in spreads across the board, with the exception of Malaysia, which continues to trade ever wider.
Nomura analysts concluded that they prefer SMC Power paper to ICTSI. They also argued that SMC should trade level to its sister company Petron when historically it has traded wider.
On Wednesday, Petron’s 7.5% subordinated deal callable in August 2018 was trading on a mid-yield of 5.371%. This puts SMC Power 56.2bp wider for a 1.3-year maturity extension.
Credit metrics
In a note to investors, Nomura said “both perps ultimately possess the same San Miguel risk and as such should trade in line with each other.”
“If anything we note that SMC Power contributed a larger portion to San Miguel’s Ebitda, has better credit metrics, higher margins and is a potential IPO catalyst, thus we slightly prefer SMC Power perps,” it added.
SMC Power is a subsidiary of San Miguel Corp, Southeast Asia’s largest publicly listed food, beverages and packaging group. In many ways the latter is a proxy for the Baa2/BBB rated Republic of the Philippines itself since its revenues amount to about 6.5% of the country’s GDP.
Nomura noted SMC Power’s downside risks include an asset light balance sheet, aggressive expansion plans and the potential for debt-funded acquisitions.
In its presentation to investors, SMC Power revealed that it has a fairly lumpy redemption profile with $300 million of debt due in 2016, $700 million in 2018 and $300 million in 2019. About 54% of its overall debt is in bank loans, with 23% comprising senior dollar bonds and 23% dollar-denominated capital securities.
Debt to Ebitda stood at 1.99 times at the end of the first half.
SMC Power accounts for about 16.5% of supply to the country’s national grid.
It has 2,903MW of total contracted capacity, of which 41% is natural gas, 34% coal, 20% hydro and 5% co-gen. By 2017 these ratios are expected to change to 50% coal, 32% natural gas, 15% hydro and 3% co-gen.
Lead managers for its bond deal were ANZ, Bank of America Merrill Lynch, DBS, Deutsche Bank, HSBC, ING, Mizuho and UBS. China Banking Corp was co-manager.
Year-to-date, companies from Asia ex-Japan have raised $4.4 billion from six perpetual deals compared with $5.5 billion from 13 deals over the same period last year according to Dealogic.
