A twin five and 10-year bond offering was priced in New York last night (Thursday) laying the foundations for significant spread tightening in the secondary market. After nearly a year since it first considered a cash tender and bond offering to term out its liability profile, the BB-/Ba3 rated credit paid investors the premium it needed to get the new deal done and took the best advantage it could of strong markets for high yield debt.
With Credit Suisse First Boston and Morgan Stanley as lead managers, roadshows were curtailed ahead of schedule and the bond priced three days early, raising $100 million of five-year debt and $250 million of 10-year debt. The former was priced at 99.99% with a coupon of 10.625% to yield 10.625% (long first coupon) or 622bp over Treasuries. The latter was priced at 99.988% on a coupon and yield of 11.375% or 630bp over Treasuries.
The early expiration date for the $329 million tender of its 2003 and 2004 bonds, meanwhile has been extended until May 2 in order to give retail investors more time. Final closure remains fixed for May 15.
Both books for the new bond deal were significantly oversubscribed, with the five-year closing nearly six times over on orders of $575 million and the 10-year nearly seven times over on orders of $1.75 billion. Originally, market participants had believed that the group would increase the deal if it could in order to use excess proceeds (after funding the tender) to pay down additional short-term debt as it falls due.
However, observers comment that the entire $1.3 billion which matures through to 2005 has now been covered via a combination of ECA facilities, the proceeds of the tender offering and projected free cash flow of $650 million. Some analysts, on the other hand, believe that there is still a slight question mark over the $524 million due in 2003 because free cash flow estimates include dividend payments upstreamed from Smart which has yet to be agreed by the latter's creditors.
It may, therefore, be the case that PLDT will need to return to the market again for the $150 million shortfall in free cash, taking advantage of cheaper funding costs should its spreads compress back to historical levels relative to the sovereign as fears of a debt crunch fade.
Historically, PLDT used to trade at a 125bp to 175bp spread to the sovereign. The current deal has been priced at a roughly 277bp premium to the sovereign's 2017 put 2012 bond and a 300bp premium to the Republic's theoretical five-year level. It has also come at a 147bp premium to B+/B3 rated Telkomsel, which priced a five-year deal earlier this week and a 178bp premium to one notch higher rated Globe Telecom, whose 2012 bond was yielding 9.59% at Asia's close yesterday.
But in reference to PLDT's own curve, the leads have scored a notable success, pricing through theoretical secondary market levels. It is also the case that back in September 2001 when the group first launched a cash tender, the group's benchmark April 2009 bond was yielding just under 12.5%, potentially pricing a new 10-year up near the 13% mark. After the deal was pulled because of September 11, spreads ballooned out and then contracted equally sharply at the beginning of this year as a new tender and bond offering was formulated.
Over the past month, the 2009 bond has traded in as tight as 10.4% and as wide as 11%, where it closed yesterday. With 20bp on the curve, this should have seen a new 10-year price around the 11.6% level (assuming no new issue premium). Yet the leads were able to use the strong demand to hold in the initial price talk and bring the new bond about 20bp to 25bp inside of where it should have priced.
A total of 188 accounts participated, with 73 in the five-year book and 115 in the 10-year book. By geography, distribution was split 50% Asia, 40% US and 10% Europe for the five-year and 56% US, 27% Asia and 17% Europe for the 10-year.
By account type, the five-year split 51% funds, 20% private banking, 19% banks, 8% insurance and 2% other, while the 10-year split 58% funds, 21% insurance, 12% banks, 7% private banking and again 2% other.
Many believe that now PLDT has begun the process of re-pricing its yield curve and eased fears of a debt crunch, investors will once again start to examine fundamentals. Both the company and its spreads should also benefit over the next few weeks from moves by the agencies. Standard & Poor's has said that it will raise the company's rating should the tender be completed successfully and Moody's has said that it will remove its developing outlook.
In the covenants attached to the new deal, PLDT has also agreed to debt limitations. Capped at 5.5 times debt to EBITDA for the first 18 months, the ratio is tightened to 5 times for a further 12 months and then 4.5 times. On an unconsolidated basis, the group currently stands at 5.17 times.
