One of Malaysia's best-regarded private sector companies IOI Corp secured a new fan base yesterday when it stormed into the international bond markets. The company priced its inaugural, upsized $500 million 10-year dollar bond at 103bp over treasuries, having amassed $3.5 billion in orders.
The huge success of the A3/BBB+ rated transaction can be explained by the rarity value of Malaysian corporate credits as well as the tightening trend of the market in the past week after benign US payroll numbers. Despite this, the issuer and lead managers Barclays Capital and Citigroup should be praised for their timing and handling of a deal that had the potential for trouble.
"We are very pleased with the tremendous response especially as this is the first time we have tapped the US dollar bond market," says Tan Sri Dato Lee Shin Cheng, executive chairman of IOI Group. "It's a good deal for IOI and for the bond investors. This is important for us as we want the issue to be a success for everyone."
Allocations saw 154 accounts come into the Reg-S deal. Of the $3.5 billion in demand, $2.2 billion came from Asia, $1.2 came from Europe and $100 million came from offshore US investors. One investor in London is understood to have put in an order for 10% of the deal, whatever size it ended up being.
The deal had strong momentum from the start, generated by a swift but intense road show of three days in Singapore, Hong Kong and London. The lead managers, Barclays Capital and Citigroup organized more than 15 one on one meetings as well as extremely well attended lunches: Singapore had 80 investors while the London lunch was said to be standing room only.
"Investor demand for quality credit remains strong in Asia, which led to the company increasing the amount of bonds available," said Steve Clayton, Director and Country Head at Barclays Capital, Malaysia. "It's a fantastic debut for IOI, opening a new source of funds for the company going forward."
Given the fact that no other palm oil plantation and property company has ever issued in the dollar bond markets before, much of the early work consisted of appraising investors of IOI's credit. Most initial concerns are said to have surrounded the company's exposure to the volatility in global palm oil prices. With 69% of its revenues coming from this sector and 31% coming from property in the bustling southern province of Johor, it was felt that there was large potential for IOI's earnings to be affected by negative price movements in each market.
Indeed S&P in its rating report on the bonds noted that 'each of the IOI business segments is cyclical with cash flows subject to volatile price swings and demand risk. CPO [palm oil] prices have been highly volatile and are affected by weather conditions, import restrictions, and consumer preferences.'
However, in response to this, the management team consisting of the chairman Tan Sri Lee and Executive Director Dato Yeo Haw pointed to the strategy of the company to extend its business downstream to provide the perfect hedge against fluctuation in oil prices. If prices at the plantation level fall then that is good for the downstream business. With low volatility in the last five years earnings growth, it was evident that this strategy had reduced the volatility that investors were concerned about.
Moreover, the management was able to assure investors that the recent clampdown on Indonesian workers in Malaysian plantations had not affected its business. Tan Sri Lee says that all its workers are legal and that the company employs the same number now as it did before the Malaysian government clampdown started.
As these investor concerns waned, so the deal gathered momentum. Bankers close to the transaction say that the first few days were spent talking credit not price, although they did have an indicative range of 107bps-112bps over treasuries. By Monday they were able to reduce the rage to plus or minus 105bps over, while increasing the size from $350 million to $500 million. Books were closed at the end of Monday trading and the deal priced at 103bps over in London on Tuesday lunchtime. Bankers say that no accounts dropped out as the range tightened and the size increased.
In terms of pricing the deal bears very favourable scrutiny against its closest comparable, the $300 million 2014 bond by Genting, which like IOI Corp is rated A3/BBB+. This deal is bid at 58bps over libor on an asset swap basis, which equates to 97bps over treasuries. With a new issue, bankers estimate that the deal would have ot price at around 105bps-107bps, slightly wider than where IOI priced.
Given the lack of supply of high grade Malaysian corporate paper, it is not surprising that this deal achieved tighter pricing than its nearest comparable. There have been no other Malaysian companies come to the market since September 2004 when Genting and Telekom Malaysia both did deals. The market is hungry for this type of credit.
Still, a level of 103bp over for an A3/BBB+ Malaysian name is a new low in terms of spread. In terms of coupon the company is paying 5.14% at an issue price of 99.294. This coupon is the lowest ever coupon for a Malaysian name apart from the sovereign.
In terms of the all in cost IOI is getting ten year paper for 3.206%. The proceeds of this deal are being used to refinance a Eur230 million loan of which roughly Eur210 remains. That loan had two years left to run and was paying a spread of 105bps over Libor. Thus this new transaction enabled IOI to considerably extend its debt profile while achieving lower absolute cost of finance and removing the risk of exposure to rising interest rates. The extra amount raised over the refinancing amount will be put to general corporate purposes, which could include more acquisitions of downstream facilities.
IOI's bonds will be listed in Singapore and Labuan. Fees on the transaction were said to be 27bp.
