First Silicon can't scupper Sarawak issue.

Sarawak shakes off First Silicon infamy to price US$ offshore municipal bond.

Deutsche Bank priced Malaysia's largest ever Reg S deal late on Friday (July 22) with a $600 million 10-year bond for the state of Sarawak via a newly formed issuance entity Sarawak International. The notes are backed by a letter of support from the State Government of Sarawak.

The deal, rated on par with the State at Baa1/A- represents a rare municipal dollar-denominated bond from Asia.

Final pricing was in line with expectations. Initially marketed to investors at around 140bp over 10-year US Treasuries or 95bp over Libor, pricing was fixed at 99.016% on a semi-annual coupon of 5.50% to yield at 5.62%.

This equated to a spread of 139bp over 4.125 10-year treasury or 95bp over Libor. Fees were a healthy 42.5bp.

The order book closed at the $1.7 billion level - an oversubscription ratio of around 2.8 times. It was allocated to 109 accounts of which 93 were new to the credit.

In terms of geographic distribution, Asia accounted for 56% of the deal, with 17% going to the UK, 13% heading to the continent, and the remaining 14% to US-based investors. By investor type, banks took 26%, fund managers 36%, insurers 21%, hedge funds 10% and retail investors the remaining 7%.

Initially mandated for $500 million - $800 million, the issuer opted to keep the size down in order to establish an effective benchmark.

In terms of comparables a practical benchmark is the Sarawak Economic Development Corp's five-year US$350 Islamic bond, issued last December. That deal price at 110bp over Libor and was trading around 75bp over mark at time of pricing. With the five-to-10-year curve worth around 20-25bp, the latest deal prices through the state curve.

Investors' main concern with new deal has been whether funds are being on-lent to First Silicon. The latter is a wafer chip manufacturer in Sarawak that has been bleeding money from the state coffers since it opened in 2001. First Silicon reported an operating loss of $268 million in 2004 and has over $1 billion in outstanding debt.

On a stand-alone basis Sarawak is viewed as a relatively strong credit. Since 2000, for example, the State has reported an operating surplus of about 50% of revenues, driven primarily by its extensive oil and natural gas reserves.

Therefore it was integral the lead made sure investors viewed the deal separately from the First Silicon debacle. Had investors been unable to shake off the stigma of First Silicon, many observers believe the deal would have been unable to price at the sub-100bp level.

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