The new global bond will have a 10-year maturity and will be rounded up to the nearest $100 million beyond the amount tendered. It is likely to be launched and priced the day before the tender officially closes on March 30 as a fixed spread to Treasuries, although the company has the right to fund itself via the bank market if they tender amount is not considered large enough. Commerce International Merchant Bank (CIMB) is also a joint bookrunner for the new deal.
Under SEC tender rules, an offering has to stay open for 20 working days, but in this instance, Tenaga will penalize investors that fail to tender within the first 10 days (by March 16). This has been done to allow the two leads sufficient time to size up and market the new global.
However, SEC rules also dictate that such a move must be legally couched as a pricing premium for investors that tender early, rather than a penalty for those that tender later. Hence, the transaction will be marketed to look as if investors submitting bonds before March 16, receive three points more than the final tender price.
Yet, since the deduction of three points from the initial tender price leaves the final tender price at a wider spread than Tenaga's current secondary market levels, it would hardly be in investors' interest to tender and is therefore unreal. In reality, those accounts that fail to tender before the cut-off date, receive three points less than the real tender price, which is offered upfront and at a significant yield pick-up to secondary levels.
This price has been set as a fixed spread over Treasuries and stands at 80bp for the April 2002 bond and 120bp for the June 2004 bond. Since the 2002 is currently bid at 165bp over and the 2004 at 170bp over, these levels represent an 85bp pick up in the case of the former and a 50bp pick-up in the case of the latter.
A fixed price spread over Treasuries, while standard elsewhere in the world, represents something of a novelty in Asia, where previous exchanges for the Republic of the Philippines, Bangkok Bank and even potentially Asia Pulp & Paper (APP), have been structured as a pick-up to the cash (dollar) price of outstanding bonds.
As one observer explains, "In the high yield market, investors look at potential pick-up in relation to cash price, while in the investment grade sector, it is looked at in spread terms. Typically, a triple-B rated credit would offer 70bp to 90bp, but since Tenaga is doing a tender rather than an exchange offering, the company can afford to be a little bit more aggressive and has opted for 80bp and 120bp."
What Tenaga stands to gain
Because there is no coercion element to the deal, either in the form of an exchange structure or Dutch auction process, there is felt to be a slight pricing advantage for the issuer. "Investors are being given a choice," one observer comments. "They can either receive cash, or they can participate in the new global bond. Because of this, Tenaga can offer slightly less.
"Were Tenaga to have opted for an exchange structure," the observer adds, "investors would have no choice and be forced to participate in a new bond deal. For many this simply wouldn't be appealing, since the two tender bonds are short-dated and held by the kind of investors which have no desire to extend themselves down the curve."
Bankers are also likely to emphasize that most normal tender offerings from the investment grade world have been forced on issuers needing to fix specific covenant problems. This was, for example, the case with the most recent comparable Asian issuer, Korea Electric Power Corporation. In October 1999, UBS Warburg successfully completed an $800 million part tender part exchange offering for the group after it was discovered that Kepco’s MTN programme contained event-of-default clauses that would have scuppered its proposed corporate restructuring.
Tenaga, by contrast, is engaging in a liability management exercise and although the group is keen to re-finance as much short-term debt as possible, it will emphasize that it is not being forced to do so. From a cost perspective, however, the rationale underlying the tender remains undeniable.
The two tender bonds were launched in 1994 and 1997 at a time when the Malaysian Ringgit was trading at a much higher level to the US dollar. Pre-crisis, specialists say the currency averaged a fairly stable M$2.4 level. Since 1998, when it was pegged to the US dollar, it has traded at M$3.8, upping Tenaga's repayment costs by 58%.
As one analyst comments, "Tenaga has taken non cash charges against this potential foreign exchange loss. But it is one thing to provision for the loss and quite another to actually crystallize it.
"Furthermore," the analyst continues, "Bank Negara is currently being very watchful of foreign currency outflows. It wants to maintain its current foreign exchange reserves at current $29 billion levels and doesn't want to see significant outflows from the country."
What investors stand to gain
Key to the success of the tender will be the geographical location and type of investors that presently hold the tender bonds. Bankers agree that since the Asian crisis there has been a steady migration of paper away from the US and back to the region. So too, the short-dated nature of the paper means that a large percentage is likely to be in the hands of asset swappers.
Specialists believe that many of these investors bought the paper at the height of the Asian crisis when spreads for even the region's higher rated credits had blown out by 500bp. It is said that a large number of the transactions are likely to have been completed on a par-par basis. This means that an asset swap desk would have picked up Tenaga paper at, for example, 75 cents on the dollar and sold it back to investors at par. Investors, would then receive the capital gain of between say 75 cents and par, as well as the coupon (7.2% or 7.875%), giving a high running yield above the 10% mark.
Getting investors to part with this high running yield in return for the short-term term capital gain offered by the tender, when the replacement cost for the yield would be perceived as a much riskier credit proposition such as Indonesia, will be the main trick to getting the deal to work.
Some observers argue that the two leads appear to be offering enough. As one points out, "Since word started to leak out about a month ago, there has been quite a significant rally in short-dated Tenaga paper and spreads have come in by about 30bp. For sophisticated investors that already have their positions in place, the tender offers up to a one-and-a-half point pick up to the cash price of one month ago and roughly one point to current levels.
"Asset swap investors will be looking at the cash price whether they've marked their portfolios to market or not," the observer continues. "They know that the 2002 bonds can be put back in one year at par. The choice they face is whether to unwind the swap, give up the asset and accept a reasonable premium to par, or whether to continue with the asset and get a lesser amount in a year's time."
"Many funds will report at the end of the first quarter," the observer further notes. "By tendering the bonds they will be able to show a big return on an annualised basis and this will be an added incentive to get them to give up the running yield they could book for the remaining three quarters of the year."
Given that the two bonds have respective coupons of 7.2% and 7.875%, this would represent a return of about 12% to 13% when an annualised capital gain of about 6% is also factored into the equation.
But observers also conclude that the two leads are being relatively realistic about the likely hit rate for the tender. The Brady bonds exchanges by the Republic of the Philippines in 1996 and 1999 achieved respective exchange rates of 33% and 40.7%. Given that both of Tenaga's bonds are illiquid and close to maturity, the company is thought unlikely to better these ratios.
The deal will also have a 100% pot structure, with a sales concession of 10 cents for the tender and 35 cents for the new global. Investors say that the roadshow, which is likely to kick off in Kuala Lumpur on either Friday or the following Monday, is tentatively scheduled to stop off in Singapore, Hong Kong, New York, Boston, Chicago and Los Angeles.
Tenaga's financial profile
Tenaga will undoubtedly be pitched as a leveraged play on the Malaysian economy similar to the way that Telekom Malaysia was, when it launched a $300 million 10 year offering in November last year. However, investors will also examine how the tender will improve Tenaga's stand-alone credit profile.
With a market capitalization of about $10.2 billion, the company is 84% owned by the Malaysian government, but is now rated one notch under the sovereign ceiling by Moody's at Baa3/BBB. In de-linking the company from the sovereign for the first time last autumn, Moody's highlighted a number of uncertainties surrounding the Malaysian electricity industry - tariff increases and an industry-wide restructuring - which Tenaga will seek to address during investor presentations.
The company currently has M$27.56 billion in debt ($7.252 billion), of which about 47% is denominated in Ringgit, 28% in Yen, 22% in US dollars and the balance in other currencies. Of this amount, about 19% is of less than one year's maturity, 12% less than two years, 27% two to five years maturity, 32% five to 10 years, 2% 10 to 20 years and 7% thereafter.
Analysts conclude that the company will argue that stronger EBITDA earnings will offset higher interest expense on any incremental borrowing over the coming three years from capex outlay. As of November 2000, gearing stood at 1.79 times, but is not expected to dip below one times until at least 2005, by which point the company should have embarked on a series of asset sales of its generation units.