The market has been anticipating the pricing of a Thai credit for the better part of this year amid rumours that issuers have been sitting in the pipeline for some time. The wait was over late Wednesday when PTT Exploration and Production (PTTEP) priced a benchmark $500 million five-year deal.
The exploration and production subsidiary of Thailand's state-owned Petroleum Authority of Thailand (PTT) became the first Thai issuer in three years to sell debt in the US dollar market.
The investment-grade bonds (A3/BBB) will pay a coupon of 4.152% and priced at par, which resulted in a yield of the same amount and a spread of 230bp over the five-year US Treasury yield.
The maturity date on the new 144A/Reg-S bonds has been set to July 19, 2015.
Lead managers Credit Suisse and Royal Bank of Scotland looked to existing Thai credits such as PTT, Thai Oil and PTT Chemical for a relative benchmark when pricing the deal. However, with little movement in the secondary market, those Thai notes are fairly illiquid. Therefore, investors also referred to the Petronas 2014 bonds, Indian Oil Corporation's $500 million five-year deal issued in mid-January this year and GS Caltex's 2016 bonds. Outside of Asia, investors also used the $1.5 billion 2015 bonds by Mexico's Petroleos Mexicanos (Pemex) and a $550 million bond from Brazil's Petrobras due in June 2015 as reference points for pricing.
Guidance was announced late Wednesday at Treasuries plus 230bp to 240bp. And thanks to strong investor interest from Asia, the bonds were able to price at the tight end of guidance at 230bp.
The most recent Thai corporate bond to price in the dollar market was a $350 million seven-year deal issued by telecom company True Move in July 2007. Given the absence of new Thai corporate paper since before the financial crisis, there were great expectations leading into this deal that it would be well received.
"Aside from being the first investment-grade deal from Thailand in a long time, it is one of the few non-financial names in Asia," said one banker.
In the end, the lead managers were able to secure a $1.7 billion order book from 152 accounts. Real money accounts with existing exposure to PTT put in orders for the bonds as did a stream of new accounts that were after the rare diversification that Thailand currently offers.
Asian investors bought 69% of the deal, European accounts took 11% and offshore US investors 20%.
In terms of distribution across investor type, fund managers and hedge funds received 75%, banks 14%, retail 6% and other types of investors 5%.
Benefitting from the scarcity value, new issue liquidity and PTTEP's stronger credit profile relative to its comparables, the bonds tightened in the secondary market and by midday yesterday were trading at Treasuries plus 226bp. For the rest of the day the bonds remained relatively unchanged at a spread of around 226bp to 227bp.
The tightening came against a backdrop that saw the Markit iTraxx Asia ex-Japan index widen 3 points to 126 during the course of yesterday's trading in Asia. Europe also opened weaker with the equity markets down about 0.5% and, in Asia, the Hang Seng Index fell 1.5%. It was clear that the six-day rally had come to an end.
With PTTEP being a subsidiary of a state-owned company, the notes were issued with a change of control and rating step covenant. The covenant will be breached if PTT's ownership of PTTEP drops below 50.1% and the company receives a simultaneous ratings downgrade. The downgrade will need to happen within three months of the change of control in order for it to be considered a break and could be by either (or both) Moody's and Standard & Poor's.
A breach will not be regarded as an event of default, but will result in a 100bp step-up in the coupon.
Currently PTT has a 65.42% stake in PTTEP and the likelihood that this covenant will be breached is very slim.
"PTT to Thailand is like Petronas to Malaysia," said one source close to the deal. "It is very important to Thailand and the government is not going to give up on [PTT] or its exploration entity," he added.
In terms of a ratings downgrade in the near future this is viewed to be just as unlikely as a change of control.
As a majority-owned government entity, the ratings outlook for PTT -- and thus PTTEP -- is driven by the credit outlook for the Thai sovereign. "Near-term downgrade risk is not an issue, with political tension cooling off and economic growth gaining traction in Thailand," said Vince Chan, a credit strategist with bond brokerage firm Amias Berman & Co.
In other words, the covenants are viewed as a standard formality for the PTTEP bonds.
The deal is Thailand's largest corporate bond issue since the Industrial Finance Corporation of Thailand issued a $500 million deal as a part of its medium-term note programme back in 1997.
The positive reception for the PTTEP 2015s might just be enough to bring other Thai corporate issuers to the market. However, as one banker put it, this may still be too early to call.
Outside of Thailand, State Bank of India is currently on the road and will most probably be the next issue to price in the region.
