The deal, managed by Citi, Deutsche Bank and HSBC, priced at par with a 6.875% coupon, equivalent to 200bp over US Treasuries, and 144.25bp over mid-swaps. Initial guidance was set at around 7%, and revised to 6.875%-7% on Thursday morning. The deal generated a $3.6 billion order book and was upsized from $500 million to $750 million, but was trading below par at a bid-offer of 99-99.125 early Friday afternoon.
Some investors say the poor performance is the result an unfortunate confluence of events, and argue that the transaction was otherwise well-executed. They say the bonds were driven south because a key index in the US weakened by 1.5% on Thursday, and because of a fast-money sell-off by traders shorting the bonds.
Others blame the poor performance on the execution. They say that the bonds were trading at a yield of 7% before London opened on Friday, suggesting that the primary deal should have priced at the wide end of the 6.875%-7% revised guidance. They go on to say the transaction was too large, adding that guidance was revised "at the last minute".
ôWe were taken by surprise, and feel we should have been treated with a little more care,ö says one investor.
However, others on the buy-side say bookrunners were very transparent with the pricing, and that it was generous in contrast to PakistanÆs outstanding 2016s, which were yielding 6.75% at time of pricing. The 6.875%-7% range announced on Thursday morning allowed investors all day to pull out should they have chosen to. According to a source close to the deal, only 10% pulled their orders as a result of tightened guidance. ôWith a $3.6 billion order book, you canÆt expect less than the lower bracket,ö says one investor.
Further, market observers state that some traders will often use a benchmark offering such as this one as an opportunity to short. ôHowever, most of the investors who were allocated bonds werenÆt sellers. This highlights the fast-money element of the sell-off,ö says one investor, who along with others, was confident the bonds would recover.
Most agree that the bond would probably have performed better at 7%, given the circumstances. However, the transaction attracted a large order book, considerable real money from the US and a solid fund interest from Asia, pointing towards a good execution on behalf of bookrunners. ôThe deal was in great shape right after pricing, but the market suffered from a cold spell. Investors went from feeling bullish to nervous, and tried to offload the risk,ö says a specialist.
This comment was supported by some elements on the buy-side. ôPricing itself was sensible, but it was unfortunate that the bond priced just as treasuries were selling off and the market was looking a little sloppy,ö says one investor.
By Friday evening, the market had settled slightly, with the price of the 10-year sovereign rising to a bid-offer of 99.375-99.625 after London opened, with a bid 5/8ths back, and an offer 3/8ths back. Increased support from the leads may have helped in this recovery. As of Friday, Deutsche Bank had apparently bought $30 million worth of bonds, and sold $15 million.
A total of 219 investors participated in the B+ rated transaction, with 35% of the bonds selling to Asia, 32% to Europe, and 33% to the US. Banks were allocated 23%, funds and asset managers 65%, insurance companies 8%, and retail 4%.
The transaction is the largest and tightest 10-year deal from the issuer, and the largest order book ever amassed by Pakistan.
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