Barclays Capital, Credit Suisse, Morgan Stanley and UBS announced the dual currency Reg-S 144a $1 billion deal on Monday and expected an easy execution given Kexim's reputation as an astute borrower. But, unfortunately, the market had other ideas.
Initially the deal was meant to comprise of a $500 million five-year FRN tranche and a $500 million 10-year fixed-rate component. Initial price guidance on the tranches was released at low- to mid-20s over Libor for the FRN and low- to mid-30s over mid-swaps for the fixed-rate notes. And the deal was scheduled to close on Wednesday (September 27).
Regrettably, the deal missed all of its projected targets.
When pricing was finalised on Thursday afternoon û a day later than expected - the issuer had raised $800 million, a full $200 million short of its initial objective. The deal was split into a $500 million five-year FRN and a $300 million fixed-rate offering.
Pricing targets were also missed. The FRN priced at par with a coupon of three-month Libor plus 22bp, while the 10-year tranche priced at 99.298% with a coupon of 5.375% to yield at 5.467%. On a spread basis that equates to 86bp over comparable US Treasuries or 33bp over mid-swaps.
The deal struggled to build a substantial and well diversified order book despite Kexim's history of issuing deals that are at least two-times covered. Adding insult to injury, not one US account participated in the sale, despite the leads going through the laborious process of registering the deal under the 144a rule.
The five-year tranche closed at $650 million with a total of 50 orders. Geographically, Asia took 40% while Europe took 60%. By investor type, banks bought 80% and others picked up 20%.
The ten-year tranche also built up a $650 million order book on the back of 25 accounts. Geographically, Asia took 10% while Europe took 90%. By investor type, banks bought 90% and others picked up 10%.
More troubling was the fact that the deal was marred by rumours that final allocations were padded by subsidised trades; meaning that some parties were offering to take positions on assets that investors were looking to sell at prices above market value in exchange for taking positions in this transaction at the reoffer price.
Overall, the result is an unfortunate outcome for Kexim, which is one of AsiaÆs strongest credits and usually attracts a bevy of investors to its deals.
So where did the deal go wrong?
Many in the market think that the dealÆs problems began with the ambiguous price guidance. It might be typical for a non-investment grade deal to have a broad price range, but for an issuer like Kexim, the guidance should have been more specific. ôIt is difficult to see where the mindset behind the initial guidance came from,ö says one source. ôThere were banks on this deal that could have executed the transaction blindfolded, so it is mystifying to understand the reasoning behind some of the decisions made.ö
Historically, Kexim has always been very clear about its pricing targets and some observers believe that the vague guidance acted as a deterrent for investors. ôTypically, borrowers have used vague guidance of this nature to build up traction on the wide end and then subsequently tighten pricing,ö says one investor. ôHowever, it is hard to believe that a borrower with the aggressive history of Kexim would price at the wider end of this ôlow to mid rangeö. I think thatÆs why the deal failed to build up any real momentum during the book build.ö
At the end of the day, Kexim seems to have misjudged market sentiment surrounding this transaction. Whether or not Kexim acted upon incongruous advice from one or more of its lead managers, the deal suggests that borrowers can no longer dictate terms in todayÆs market environment.
öPricing flat to inside of secondary trading just isnÆt a reality nowadays,ö says one DCM specialist. ôBorrowers have to understand that investors have the authority to determine what deals they want and at what levels. The days of the aggressive Korean quasi-sovereign persistently pricing inside of their own curve is at an end.ö
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