The pricing of a global bond offering in New York last night (Thursday), sees the company finance a simultaneous tender offering that succeeds in achieving a cost-efficient extension of its liability profile. Led by HSBC, Lehman Brothers and Commerce International Merchant Bankers (CIMB), the Baa3/BBB-rated credit has brought in a new 10-year issue at 99.594%, with a coupon of 7.625% and yield of 7.684%, equating to 295bp over Treasuries.
Market observers say the book closed just about two times subscribed, with a total of $1.1 billion orders, of which investors state that HSBC and Lehman equally contributed $500 million and CIMB $100 million. Under the pre-arranged economics of the deal, however, Lehman will receive 40%, CIMB 35% and HSBC 25%.
Bankers and analysts concur that the deal has not only been priced at the right point on the Malaysian credit curve, but also caught a very fortuitous new issuance window, which may now be closing.
As one observer puts it, “Had this deal come next week, or even a few days later, the story could have been very, very different. What it seems to have done is catch the tail end of a good new issuance window, where heavy supply has met good demand from investors. This afternoon in New York, however, the atmosphere has become exceptionally gloomy. Having expected a 75bp rate cut from the Fed, the bond market is now getting very frightened about the equity market and pressure is building on emerging market paper, which has always been highly correlated to movements on the Nasdaq.
“Tenaga, on the other hand, has been able to lock in an incredibly low Treasury rate of 4.734%,” the observer continues. “This kind of level for 10-year rates hasn’t been seen for many days over the last few decades.”
Against its nearest.comparables, Tenaga also appears to have maintained the right balance. As Barclays Capital analyst Imogine Baker comments, "We think the bond has come at fair value. Rightly speaking, it should price about 30bp back from Malaysia Telekom and has actually come about 20bp back on a like-for-like basis. But this is more to do with the fact that Telkom has recently blown out about 10bp at the longer end of the curve. Relative to the sovereign, it has also come at the right level."
During pre-marketing the deal was pitched at an 80bp premium to the sovereign and came at this level relative to the secondary market bid of the Federation's June 2009 bond, trading at a 212bp over Treasuries on the day of pricing. Yet on a like-for-like basis, the deal has come slightly tighter, given that a roughly 10bp per annum spread on the Malaysian credit curve would put a theoretical 10-year sovereign at the 235bp level.
Other comparisons show the Petronas October 2006 bid at 209bp, the Telekom December 2010 at 262bp and the Tenaga April 2007 at 245bp. Typically, Telekom and Petronas tend to trade in line with each other at the shorter end of the curve, or up to 30bp in Petronas's favour at the longer end of the curve.
In the final hours before pricing, investors say that Tenaga's indicative spread was inched 5bp tighter from 300bp. Many had expected the deal to be scaled back to $500 million to compensate for the slightly more aggressive pricing, but a rallying treasury market enabled the transaction to stand at the $600 million mark.
This was the ceiling permitted under the terms of the tender and global bond offering, initiated by the company in a bid to term out its debt. At the effective close of the tender on March 16, some $479 million bonds were tendered, or $517 million after premium and accrued interest is taken into consideration. This was then rounded up to the nearest $100 million.
In terms of geographical splits, observers say the book was fairly evenly divided between Asia and the US, with marginal interest from Europe. Investors recount market reports of just over 100 accounts participating, with little overlap between those accounts that tendered bonds and those that submitted orders for the new global.
In the main, Asian investors were said to have viewed the new deal as a leveraged play on the sovereign, while US investors were more concerned with the individual credit profile of the company.
The latter were said to be particularly concerned about the company's future capex burden and the fact that Tenaga ranks as the country's most highly geared public entity. "What the company was able to show is that it has pre-funded its capex through the domestic bond market," says one commentator. "Most of the existing capex has been used to build a transmission system and Tenaga can now leverage this system to grow the business."
Moody's, on the other hand, has cited Tenaga's heavy gearing (roughly 179%) and uncertainties about domestic rate increases and the deregulation of the electricity industry as the main reasons why it has kept the company one notch below the sovereign's Baa2 ceiling, despite its 84% government ownership.
The government has yet to decide whether it will allow Petronas to increase the price of gas it sells to Tenaga by 20% and whether Tenaga will be able to redress the balance by increasing rates. The company is particularly hoping that the government will heed the lesson from California, where domestic electricity companies have recently been pushed to the brink of bankruptcy after local authorities capped electricity rates, but set no limit on how much they had to pay for the power needed to generate the electricity in the first place.
Tenaga has subsequently used this example to argue that deregulation of the domestic electricity industry should be re-considered. However, as Barclay's Baker puts it, "Most people believe that Tenaga's new chairman Jamaludin Jarjis came in last September with the full intention of trying to halt deregulation. They believe this was always the game plan and that the Californian crisis, therefore, came at a very convenient time.
"During roadshows," she adds, "the company talked a little bit about establishing a managed pooling system, but didn't really elaborate any further."
The tender offering
Here the company was also gratified by its ability to achieve the ratios it had been hoping for. An overall tender ratio of 53% was also very respectable in the context of previous Asian exchanges. This was particularly the case versus the two Brady bond exchanges conducted by the Republic of the Philippines in 1996 and 1999, which respectively achieved rates of 33% and 40.7%.
Tenaga had further been keen to take out a greater percentage of the shorted-dated of the two bonds and achieved this ambition as well. The two bonds comprised a: $300 million 7.2% note due April 2007 put 2002 and a $600 million 7.875% note due June 2004.
The former achieved a 59% tender rate, equating to $176 million and the latter a 51% rate, equating to $303 million. Geographically, about half the participating investors were said to have come from Asia and the balance mainly from the US.
"As expected, most of the total return accounts tendered, while the most difficult to bring in were those investors holding bonds in CBO products," one observer comments.
Under the SEC directed timetable for tender offerings, the deal officially closes on March 30 and the company will pay investors on April 2. SEC regulations require a tender to stay open for 20 days, but allow one effective closure before this time period if the earlier cut-off date is legally couched to appear that later submissions will be rewarded with a pricing premium. In reality those that do submit later incur a penalty, in this case, a deduction of three points from the tender price.
Tenaga fixed the tender price as fixed spread over Treasuries, equating to 80bp for the April 2002 bond and 120bp for the June 2004 bond.
For Tenaga, the company has managed to improve its liability management by stretching out its maturity profile. Since Malaysia imposed a currency peg to the US dollar in 1998, the company has shown itself to be extremely loath to venture back into the international capital markets for fear of further exposing itself to the kind of foreign exchange risk which prompted the need for a tender offering in the first place.
The two tender bonds, for example, were both launched before the Asian crisis when the Malaysian ringgit had been trading at a much higher level to the US dollar. Pre-crisis, the currency averaged a fairly stable M$2.4 level, but has since been pegged at M$3.8, in the process upping Tenaga's re-payment costs by 58%.
As a result, the company's short-term term debt spiked up by about 118% between 1999 and 2000 as it retreated back to the domestic bond market. At the beginning of the tender period, this meant that 31% of its M$27.56 billion ($7.252 billion) debt was of two years or less. Some 19% was of less than one year's maturity, 12% less than two years, 27% two to five years, 32% five to 10 years, 2% 10 to 20 years and 7% thereafter.
By currency, about 47% was denominated in ringgit, 28% in yen, 22% in US dollars and the balance in other currencies.
"The main point of this whole exercise is that Tenaga has got the right extension trade,” one observer concludes. “It was paying 7.2% for one year debt and is now paying 7.625% for 10-year debt. It also managed to complete its deal during the worst week for the US equity market in its entire history. Bond investors are still very nervous and retreating back to the sidelines following the FOMC meeting. For Tenaga, it has been no mean feat and the bonds are holding up well at the close of trade in New York at 294bp/291bp.”
