The Philippines International Container Terminal Services (ICTSI) executed its second perpetual of the year on Tuesday with a deal that appeared to catch a good market window ahead of the early autumn rush and potential interest rate volatility.
The unrated group attracted a $1.8 billion order book for a senior issue that was upsized to $450 million from early indications around the $300 million to $350 million level. Pricing was also narrowed from an indicated yield of 5.75% to 5.5% on an issue price of par and spread of 391.6bp over Treasuries.
The perpetual deal was issued in the name of Royal Capital BV with a guarantee from ITSCI and is callable in May 2021 when the coupon steps up by 250bp. This differs from the group’s previous $300 million deal in January this year, which has a first call option in 2019 but no step-up until May 2024, when the yield also increases by 250bp.
Pricing came 59.5bp wide of the outstanding 6.25% perpetual, which was trading Tuesday on a mid-price of 104.5% to yield 4.905%, or 350bp on a Z spread basis.
Bankers said the interest rate curve between 2019 and 2021 is worth about 37.5bp to 40bp, with the credit curve adding a further 15bp to 20bp. “The new issue premium was in the low to mid single digits depending on your view of the interest rate and credit element,” said one source close to the deal.
A total of 113 investors participated in the Reg S offering, with a 30% allocation to private banking clients, slightly lower than normal.
“There was very good support from institutional and real money accounts,” the source added. “General market conditions mean investors remain cautious, but they are there for well known names like this one.”
Rallying Treasuries on Monday and another sharp 6.2% drop in the Shanghai Composite Index on Tuesday failed to make much impact on credit markets during Asian trading hours, with sales desks reporting little selling activity.
ICTSI’s 6.25% deal remained steady at 104.5% and has rewarded investors who purchased it when it was executed on January 22 at the issue price of 99.551%. Within its first day of trading it was up to 101.25% and within its first month it hit 104%.
It then reached a year-to-date high of about 106% at the very end of May before slipping back slightly during the Greek crisis to the 105% level just before China devalued its currency.
Other Filipino perpetuals such as Petron Corp’s 7.5% June 2018 call deal have also held up relatively well. The oil company’s transaction is currently trading on a mid price of 105.5% to yield 5.46%, or 425bp on a Z spread basis.
PTTE&P’s Baa3/BBB- rated 4.875% deal callable in June 2019 has performed less well. It fell 2.375 percentage points during the Greek debt crisis compared to ICTSI’s 1.5 percentage point fall.
On Tuesday it was trading on a mid-price of 99.625% to yield 4.98% or 352bp on a Z spread basis
Perpetuals have continued to attract investors looking for yield enhancement in a low interest rate environment and if they believe the US Federal Reserve will once again step back from raising rates in September they may continue to outperform a while longer.
“A couple of weeks ago it was a one way bet,” ICTSI Treasurer Rafael Jose Consing told FinanceAsia. “That has now changed. But for us the main consideration was balancing the negative cost of carry from raising funds now against the certainty of covering our remaining need for 2015 and pre-funding part of 2016’s requirement.”
Consing said he was pleased with the deal’s reception and felt the group had found a good market window. “Interest rates will go up,” he continued, “but no-one knows the exact timing. But I do know that I wouldn’t want to be in the market just before it happens whether that be September, December or any other month.”
ICTSI chose a structure with a 2021 call option as this fits the group’s maturity profile since it has almost no debt falling due that year, or in 2022. Consing said the group caps individual issues around the $450 million mark because it wants to maintain a conservative stance towards to its principal redemption profile.
Where possible it seeks to make sure it has no maturities falling beyond its current operating cash flows so that in the worst-case scenario of a severe market dislocation it will always be able to redeem outstanding debt.
According to the group’s investor presentation, net debt to Ebitda stood at 2.1 times in the first half of 2015, up slightly from two times at the same point the previous year but steady overall since 2012. Ebitda to interest expense stands at 7.9 times.
Since 2012, operating cash flow has risen from $285.8 million to $387.5 million. Roughly half the company’s revenues are dollars, followed by pesos on 29%, the Brazilian real 6%, euros 4% and renminbi 3%.
Neither the 6.25% issue nor the new 5.5% issue is rated since the agencies do not consider perpetuals with short-dated call options to be equity. However, companies are allowed to account for them as such and Consing said he likes the structure because it enables ICTSI to fund its ongoing projects at the lowest cost of capital without incurring additional leverage.
The group’s investor presentation says total capacity will rise from 12.7 million TEU’s (twenty-foot equivalent units) in 2014 to 13.38 million by the end of 2015 and will then expand to 19.1 million by 2018.
The group currently has 30 container terminal operations in 20 countries, led by the Philippines where its port accounted for 65% of the country’s international cargo in 2014 and 34% of the company’s throughput by TEU.
Second is Ecuador where its port has a 67% market share and accounted for 14% of ICTSI’s TEU throughput. Third is Pakistan where the respective ratios for its port in Karachi stand at 60% and 9%.
ITSCI recently reported first-half results with revenues up 8.2% at $552.1 million. Container volumes grew 9% with throughput of 3.8 million TEU’s, led by Asia on 12%.
JP Morgan analysts said there could be near-term margin pressure because of the ramp up of its Argentinian and Colombian ports during the fourth quarter of 2015 and first quarter of 2016.
The company continues to look for new M&A opportunities with analysts reporting an interest in ports in Cameroon, Kenya and Indonesia.
Lead managers for the perpetual bond deal were Citi, Credit Suisse and Standard Chartered.