Investors fight over Sri Lanka Telecom

Tight pricing and large order book fuel success.

Sri Lanka Telecom made its debut in the international bond markets on Friday (November 19) with an unexpectedly strong investor showing for its five-year bond deal. Part of its achievement can be attributed to rarity value given the deal marks the first fixed rate transaction from Sri Lanka and the country's first rated offering.

Under the lead management of Standard Chartered and UBS, the B+/B+ (Fitch) rated group attracted an order book of $1 billion for a $100 million deal and was able to tighten guidance from the 7% area to 6.875%. Indeed, the provisional five-day roadshow covering Asia, Europe and the Middle East was cut short, with management visiting just Hong Kong and Singapore in the end.

Final pricing was settled at par on a coupon of 6.875% to yield 340bp over Treasuries and 300bp over Libor. Fees were 50bp.

The most obvious pricing comparables are the Indonesian cellular companies since they all share the same B+ rating from Standard & Poor's. Sri Lanka Telecom and PT Indosat also both benefit from the halo effect of a major shareholder with a much higher credit rating.

Sri Lanka Telecom is 35.2% owned by AA- rated NTT Communications of Japan, with the Sri Lankan government holding a further 49.5%. Indosat, meanwhile, is 42% owned by Singapore Technologies Telemedia, an arm of the AAA-rated Singaporean government.

Indosat has a November 2010 bond outstanding, bid Friday at 6.62% to yield 315bp over Treasuries and 251bp over Libor.

Indonesia's third largest cellular operator, PT Excelcomindo, also has a comparable 8% January 2009 bond outstanding that was bid Friday at 7.29% to yield 382bp over Treasuries or 352bp over Libor.

Pricing through PT Excelcomindo represents a notable achievement given how well-defined the Indonesian credit curve is and how strongly it has performed of late. In mid-July when the Asian high yield sector was experiencing its greatest difficulties this year, Excelcomindo was bid at 9.34%.

At this point, it was trading about 169bp wide of Indosat, which was bid at 7.65%. Both have traded in sharply since then and the differential between the two has also narrowed to just 67bp on a yield basis.

Sri Lanka Telecom may, therefore, have not only generated a huge amount of momentum for its trade but timed it to catch the top of a market which has little immediate upside. The deal was geographically well distributed, with 50% placed in Singapore, 28% in Europe, 13% in Hong Kong, 5% in the Middle East and 4% with offshore US funds.

By investor type, 56% went to asset managers, 34% to retail, 7% to banks and 3% to insurance funds.

In its ratings report, Fitch said that Sri Lanka Telecom has extremely strong credit stats compared to other telecom operators in its ratings category. At the end of 2003, net debt to EBITDA stood at 1.1 times and the group ran an EBITDA/interest coverage ratio of 7.2 times.

By comparison, Excelcomindo had a debt to EBITDA ratio of just under three times at the time of its bond in January and an EBITDA/interest coverage ratio of 11 times.

However, both Fitch and S&P point out that Sri Lanka Telecom's ratios are likely to weaken because of its capex plans. The company represents Sri Lanka's only integrated telecom operator, but its market share in the mobile sector is a weak 18%.

As such proceeds from the bond are being used to expand its wireless business (Mobitel). The company has an 88% share of the fixed line sector. It recently reported third quarter profits of Rs805 million ($8.05 million).

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