Deutsche Bank and Merrill Lynch have been chosen to lead manage a $300 million to $400 million 10 year bond offering with a euro-144a format. The mandate represents a major breakthrough for both banks, but particularly Merrill Lynch, which has been trying to break into Malaysia for some time.
For many market participants, Merrill's selection also marks an extremely luck breakthrough since it was widely believed that Telekom's house bank JP Morgan would lead any potential bond deal. The latter is since thought to have been conflicted out, however, by an M&A transaction. Indeed, for Merrill Lynch, the deal represents its first major mandate in a country where Credit Suisse First Boston, JP Morgan, Salomon Smith Barney and to a less extent Morgan Stanley Dean Witter have been regarded as the major players.
Having decided to re-enter the international debt markets, the deal is said likely to have a fast track to market and should be launched by the end of October. Given a recent dearth of new issuance from Asia, the potential for upgrades across the Malaysian credit spectrum and strong secondary market performance of sovereign spreads, bankers expect the deal to go well.
"Asia desperately needs a new bond deal," says one banker. "The demand for quality credits is there and this deal is a perfect size to whet the market's appetite. It's large enough to capture investors' attention, but small enough to ensure tight pricing and good momentum for the rest of the pipeline through to the end of the year."
"Coming now also makes sense," the banker adds. "A lot of global telecom deals are expected to meet the financing needs of the 3G licences and coming at the head of the queue may generate a price advantage."
In terms of pricing, a consensus is already converging on a 25bp to 50bp premium over sovereign paper. Of this figure, half derives from a new issue premium and half as a pure spread of semi-sovereign to sovereign paper.
The Federation of Malaysia's benchmark 2009 deal is currently trading at a bid/offer spread of 207bp/202bp against bid/offer levels of 180bp/170bp for Telekom's 2005 bond. The latter comprises a $200 million 7.125% issue launched via JP Morgan in August 1995 at 72bp over Treasuries. At the same time, the company also raised $300 million in 7.875% 2025 paper at 102bp over Treasuries. This is presently trading at a bid/offer spread of 283bp/268bp over Treasuries.
Telekom is rated at the Federation's BBB/Baa3 level and analysts expect both agencies to upgrade the sovereign and its associated entities by the end of the first quarter of 2001 at the latest. An upgrade by Moody's to Baa2 has already been discounted by the market, with the real uncertainty centreing on when, or if Standard & Poor's will take Malaysia up to the BBB+ level.
"From a credit perspective we think that Korea is an A- credit and Malaysia a BBB+ credit," says John Woods, head of fixed income research at HSBC Markets. A number of analysts consequently believe that Malaysia should not be trading through Korea, whose 2008 bond is currently changing hands at a bid/offer spread of 220bp/215bp.
"We see no fundamental logic why the Malaysia 09 should trade through the Korea 08 and maintain the view that investors favouring the opposite trade are best positioned to capture relative value opportunities," Woods comments.
HSBC and others argue that the situation has occurred because investors are faced with a constant barrage of negative restructuring and bankruptcy-related news from the Republic and little in the way of jarring reform from the Federation, where investors have focused on a stronger oil-derived and 'growth over reform' credit story.
"Malaysia has been a bit of a favourite with the market because there don't appear to be any near-term risk in terms of the sovereign profile," Woods concludes.
And a second analyst adds, "It's what investors have chosen not to see that is interesting. If you the analogy of a car, both countries are revving up the engine, but while Malaysia remains stuck in second gear, Korea has pushed down into third. While the latter is moving very aggressively to restructure itself, the former has an operating environment in which UMNO still holds complete sway. Investors are voting with their feet and this has left domestic investors increasingly worried about Malaysia's attractions as an investment site."
Needless to say, analysts and bankers would welcome a new deal and have been pushing hard to persuade the government to act for the best part of a year. Whether it will do so now is said to rest in the combined hands of the Finance and Prime Minister. Bankers are hoping that one or other of the two will break a deadlock between Bank Negara, which is emphatically opposed to a new bond issue and the Ministry of Finance, which is more amenable to the idea.
A number also believe that it would make more sense to allow Telekom Malaysia to test the waters first and then wait to see if S&P makes a positive move before coming back to the market. Should Petroliam Nasional Berhad (Petronas) opt to do a deal on the back of non-deal roadshows being held in Europe via Morgan Stanley Dean Witter and Salomon Smith Barney next week, bankers also believe that the chances of the sovereign showing its before the end of the year would become more remote still.
