The BBB/Baa2-rated sovereign's Eu500 million ($428 million) deal has been roundly panned by just about every DCM professional in Asia, with the obvious exception of its two lead managers Barclays and Deutsche. London syndicate hands, by contrast, report strong demand for the five-year deal, which is said to appeal to European bank buyers and smaller institutional accounts that hold euro rather than dollar paper.
Even in Malaysia itself, there has been a sharp division of opinion between Bank Negara, which has remained opposed to a euro deal from the very beginning and the Ministry of Finance, which wants to set a benchmark and diversify the sovereign's investor base. At issue is whether Malaysia is making a sensible strategic decision to branch out into euros and how much it will have to pay for it.
Asian bankers, taking note of the recent distribution pattern of international deals from the region, believe that without a strong Asian bid, any potential deal stands to be held hostage to the pricing demands of unfamiliar investors. Most believe that because of the currency's weakness and unfamiliarity to Asian bank investors, there will be almost no demand from the region.
"It's madness," says one banker. "Any Asian investors that have bought euro deals before have got absolutely hosed and certainly don't want to get tied into what will become a very illiquid deal."
The second issue concerns the cost effectiveness of euro-denominated borrowing and whether the government should swap the proceeds to avoid re-payment risk in the event of the beleaguered currency appreciating. To date, the currency is still down more than 25% against both the dollar and yen since its formal introduction in January 1999.
Should the government opt to swap proceeds into dollars, bankers argue that it will cost more than simply funding in dollars in the first place. "If the government does swap the proceeds, then it is hardly setting a benchmark transaction for other Malaysian companies to follow," one DCM head argues. "Why would other companies choose to fund in currency that is going to cost them more?"
Also cited is the example of the Korea Development Bank (KDB), which issued in euros earlier this year and has averaged a 10bp to 15bp premium to dollar levels ever since.
However, London-based euro-professionals believe that Malaysia is just the right sort of credit to set the markets alight and believe that it will attract extremely strong subscription levels. Where pricing is concerned, bankers counter that the deal will price flat to dollar levels, without necessitating a new issue premium.
"Ok, so the country may lose a couple of basis points on the basis swap should it convert proceeds into dollars," says one banker. "But this will be balanced by the savings it makes from not having to pay a new issue premium in the dollar market."
Although last week Hong Kong's MTR Corp similarly launched a $600 million 10-year dollar deal without a new issue premium, bankers add that this might not play the same way for Malaysia since it is returning to the market shortly after one dollar deal and one where it did pay a premium.
With Chase as lead manager, the sovereign re-opened its $1 billion 8.75% 2009 transaction in mid-September, adding a further $500 million in paper at a 10bp premium to its then trading price of 205bp over Treasuries. The issue is currently trading around 230bp bid, equating to about 125bp over on a Libor basis.
Taking into account about 12bp to 15bp on the swap curve between five and 10 years, this would price a new Malaysian five-year dollar deal at about 100bp over Libor. "The curve between five and 10 years in dollars is fairly flat, so if the sovereign wanted to issue in dollars it would make more sense to go for maturity," one banker explains. "In euros, however, the curve is quite steep and it would have to pay up for market access at 10 years, so a shorter-dated issue makes more sense."
European bankers report strong demand for sovereign credits. "Strong investment grade, OECD credits get great execution, but even Latin American sovereign credits have gone down well and can borrow cost efficiently," one banker explains. "This is because there has been a lack of product in the market, Europe has a strong retail element, price sensitivity is lower and we are dealing with real money accounts, that is buy and hold investors rather than momentum-driven US investors."
He adds, "This deal will be extremely well received because it has such rarity value. Malaysia hardly ever borrows in the international markets and European accounts have had virtually no access to paper when it has. All the paper will get sucked up and there will be little opportunity for secondary trading."
European banks are thought likely to the largest buyers, with one UK bank said to be contemplating placing a Eu100 million order. Such appetite is said to be driven by the yield pick-up Malaysia will offer over similarly-rated emerging market sovereigns from Eastern Europe.
Baa1/BBB+ rated Hungary, for example, only two weeks ago re-opened a five year FRN at 22bp over euribor and saw heavy demand from German banks. "There is a big chasm between the likes of Hungary, Poland and Greece which attract a core European audience and the rest," one banker comments. "But for a bank which regards Malaysia as a solid investment grade credit, then an 80bp pick-up over these kinds of levels is a trade that has to be done."
Retail demand, however, is said likely to be more muted since non-investment grade Latin American sovereigns offer coupon-driven investors much higher returns.
For institutional accounts, there is a split between the smaller funds, which only hold euros and are therefore likely to be receptive and the larger funds, which hold euros and dollars and will have to take a currency view. As an investor from one of Germany's largest funds puts it, "We like Malaysia and think that although it is looking expensive relative to other Asian credits, it offers a safe haven in volatile markets, particularly with everything that is going on in Argentina.
"However, we were a little surprised to see them come in euros. All our funds are benchmarked against dollar indices and we would have preferred the sovereign to build a yield curve, rather than issue two bonds in two different currencies, then not come back again for years."
Roadshows which started in Frankfurt on Wednesday, continue in Munich, Amsterdam, Paris, Milan and finally London on November 15, when the deal should price. Co-managers are ABN Amro, CIMB, Dresdner, HSBC, JP Morgan and Salomon Smith Barney.
