Telekom Malaysia secured a huge $5 billion order book for its $500 million deal yesterday (September 13), enabling the group to close the gap with the sovereign and price through the country's main quasi-sovereign benchmark, Petronas.
The deal was astutely timed to take advantage of any possible spread momentum generated by Malaysia's budget statement on Friday. However, it also benefited from a massive stroke of luck after Moody's unexpectedly upgraded the group's rating by two notches on the same day.
The upgrade from Baa2 to A3 meant Telekom Malaysia pierced the sovereign by one notch for the first time in its history. Previously, Moody's has upgraded a few global oil companies with US dollar-denominated balance sheets above their respective sovereigns. But it has rarely done so for any other corporates and certainly never in Asia.
Its move prompted rapid spread tightening across the entire Malaysian curve, with individual credits tightening 5bp to 15bp over the course of Friday and Monday.
Telekom Malaysia's new 10-year deal has come to a market where investors expect further spread momentum fuelled by the likelihood of a sovereign upgrade from Baa1 to A3. Telekom Malaysia is currently rated A- by Standard & Poor's, in line with the sovereign rating.
Under the lead management of CIMB, Deutsche Bank and UBS, pricing came at the tight end of guidance. With an issue price of 99.754%, the deal was priced on a coupon of 5.25% and yield of 5.282%. This equates to 112bp over Treasuries or 66bp over Libor. Fees are 25bp.
Some 187 investors are said to have placed orders totaling $5 billion. By geography the deal had a split of Asia 57%, Europe 39% and offshore US 4%. The Asian breakdown had a further split of Singapore 33%, Hong Kong 11%, Malaysia 6%, Korea 5% and Japan 2%.
By investor type, asset managers took 57%, banks 27%, retail 10% and insurance companies 6%.
The two main pricing comparables are state-owned oil company Petronas and the sovereign itself. On a like-for-like basis, bankers estimate Telekom Malaysia has priced about 5bp through the former and10bp over the latter. Historically it has traded at least 15bp wide of the sovereign.
At the time of pricing, Petronas had a 7.75% August 2015 bond outstanding, trading at 117bp over 10-year Treasuries and 74bp over Libor. The Libor curve is worth about 3bp per annum based on the differential between Telekom Malaysia's outstanding 2010 bond and its new 2014 bond. The former - an 8% December 2010 bond - was trading at 117bp over five-year Treasuries, or 55bp over Libor.
The sovereign's most comparable bond is a 7.5% July 2011 bond, which was trading at 42bp over five-year Treasuries and 47bp over Libor.
One of the most interesting consequences of Moody's action is that Malaysian quasi-sovereign credits are now very close to their Korean counterparts. Historically such a tight differential is very rare and usually not sustained for very long. Investors may, therefore, be asking themselves how much more spread tightening is left in the Malaysian curve and whether it will soon be time to take profits.
For example, A3/A- rated Korea Land has a May 2014 bond trading at 98bp over Treasuries and 58bp over Libor.
Proceeds from Telekom Malaysia's new bond deal are being used to re-finance a $200 million eurobond, which matured in August and potentially a rumoured $200 million investment in Idea Cellular. Telekom Malaysia and Singapore Technologies Telemedia have said they are looking to bid for the AT&T, Birla and Tata-owned Indian cellular operator, but have not yet put out a firm offer.
In its ratings release Moody's said Telekom Malaysia's A3 rating was supported by its 65% government ownership, strong financial profile and the operational benefits of the recent integration of cellular operator Celcom with its own cellular arm Telekom Cellular. Together the two control 38% of the domestic cellular market.
According to S&P, Telekom Malaysia has enjoyed an average debt to capitalization ratio of 35% over the past three years and a debt to EBITDA ratio of 1.9 times. Despite Telekom Malaysia's overseas expansion plans, the agency says it does not expect the two ratios to respectively top 40% and two times.
All eyes are now on the sovereign rating. On Friday, the government strengthened its case for a ratings upgrade after announcing plans to cut the government deficit from 4.5% estimated in 2004 to 3.8% in 2005. It principally hopes to do so by cutting expenditure.
