Khazanah, Temasek battle it out for bond investors

Two of Asia's rarest quasi-sovereign credits choose the same day to launch landmark bond deals.
Asian heavyweights vie for investors' attention
Asian heavyweights vie for investors' attention

Two of Asia's rarest quasi-sovereign credits choose the same day to launch landmark bond deals on Tuesday, with a $750 million global sukuk issue from Malaysian sovereign wealth fund Khazanah Nasional Berhad and a €1.1 billion deal from its Singaporean counterpart Temasek

Both deals were ground breaking transactions in their own right given that Khazanah was bringing its first straight dollar sukuk and Temasek has never issued in euros before.

However, some market participants queried why Temasek decided to press the button on its deal knowing that Khazanah was already in the market.

"I know they're targeting different investor bases but comparisons will be inevitable so you have to wonder whether Temasek wanted to steal Khazanah's thunder," one fund manager told FinanceAsia.

Syndicate bankers replied that the timing was pure coincidence. "These are both thoughtful borrowers," said one. "They've each been preparing to come to market for a while. It's just one of those things."

And indeed, the two deals turned out to be very different beasts with a stark difference in their respective order books - a tale of fire and ice. 

Khazanah struggled to build up a meaningful demand compared to previous sovereign sukuk deals from Malaysia and ended up with a club-like deal and significant allocations to Malaysia. 

Temasek, by contrast, executed a true institutional offering that attracted a €2.15 billion final order book.

One thing in common the two sovereign wealth funds do share is a reputation for punchy pricing and the two new transactions showed both acting true to form, according to fund managers.

Khazanah prices through fair value

Bankers estimated that Khazanah priced about 2bp through the tightest end of fair value estimates spanning 180bp to 188bp over Treasuries. 

The sovereign rated group was only able to build up a peak order book of $850 million at the time price guidance was revised from 190bp over Treasuries to between 178bp and 180bp. Bankers said a few orders dropped off at this point, but there was still enough of a margin to complete a $750 million deal. 

Final pricing for the unrated Reg S Wakalah trust certificate was fixed at par with a distribution yield of 3.035%. The issuance vehicle was Danga Capital Berhad, which acted as issuer and trustee - in line with many shariah-compliant transactions where interest payments are structured as profit sharing arrangements. 

Distribution stats show that 50% went to Malaysia, 39% rest of Asia and 11% Europe. By investor type banks took 81%, central banks 13% and fund managers 6%. 

Syndicate bankers said they opted against using Khazanah's 3.725% August 2020 paper as a benchmark since it is denominated in Singapore dollars and trades with a different dynamic to Malaysian sovereign entities' dollar-denominated debt.

Instead, most accounts focused on the Federation of Malaysia's 4.646% July 2021 global sukuk. This was trading on a G-spread of 138bp on Tuesday, which means Khazanah has offered a 40bp premium on a like-for-like basis. 

However, bankers said a number of accounts had argued for a 50bp pick up. This was partly based on the new transaction's lack of rating, which barred some accounts from participating. 

It was also based on the fact that Khazanah's original debut sukuk, issued in 2006, carries an explicit sovereign guarantee. This M$2 billion ($474 million) deal matures in December 2016 but is being redeemed next month. 

Another comparable was Petronas' 2.707% 2020 bond, which was trading on a G-spread of 174bp on Tuesday. Historically, Petronas has always traded through the Federation based on a two notch higher rating of A1 from Moody's compared to the sovereign's A3 rating. 

Falling oil prices have put paid to that, however, and it now trades up to 40bp wider.

"Khazanah's new sukuk offers a little bit of a pick up to the sovereign sukuk and is relatively generous compared to Petronas," one banker commented.

The banker added that the syndicate expects very few loose bonds when the deal opens for trading on Wednesday. "I can see how pricing looks from the outside given the size of the order book," the banker added. "But about half this deal has gone to buy-and-hold investors in Malaysia and the order book was very clean. These are very sticky accounts."

Khazanah needed to rely on its home market because Malaysia is hardly flavour of the month with international investors right now given its oil-dependent economy and the ongoing Swiss investigation into Malaysia's state investment fund 1MDB.

In an Instagram post earlier this month, CIMB chairman Nazir Razak compared his country's situation to George RR Martin's Game of Thrones.

The brother of prime minister Najib Razak said, "So what lies ahead? The parallels with GoT continue. The future terrifies me: I just can't see how our institutions can recover, how our political atmosphere can become less toxic, how our international reputation can be repaired."

The impact of this was clearly demonstrated by the difference between Khazanah's $850 million order book and the $9 billion in demand the Federation attracted last April when it priced its fourth international sukuk - a $1.5 billion split 10- and 3-year global deal.

Some four years earlier, it had also been able to build up a similar $9 billion order book for a $2 billion split five- and 10-year sukuk. 

Both tranches of the April 2015 deal are trading below issue price, with the 2025 tranche quoted at 98.76% on a yield of 3.2% during Asian trading on Tuesday and the 2045 tranche at 98.02% on a yield of 4.356%. 

At the same time, there have been some signs of spread stability since the beginning of the year, with the 10-year yielding 3.67% at the end of December and the 30-year at 4.8%.

Where Khazanah's own credit is concerned, some investors were also probably focused on its falling profitability thanks to its restructuring efforts with Malaysian Airlines and the likelihood it will need to pay additional dividends to the government because of the shortfall in oil revenues. 

In its ratings release, Rating Agency Malaysia (RAM) said that Khazanah's debt had spiked to M$38.8 billion last May, up from M$35.8 billion in December. Over the course of 2014, the group's interest coverage ratios also weakened from 5.54 times at the end of 2013 to 3.87 times one year later. 

Joint global bookrunners for its new deal were CIMB, DBS and Standard Chartered. This is a different line up to the banks, which took Khazanah on a roadshow for a sukuk deal in mid-January before volatile global markets made the deal impossible to execute. 

Then the group had mandated Barclays, CIMB, Morgan Stanley and UBS. The only bank to make it through to the final cut is CIMB, which is not that surprising given Khazanah is its single largest shareholder. 

Temasek makes euro entry

While Khazanah was struggling to attract investor interest, its much larger counterpart made a successful euro debut on Tuesday, taking advantage of recent spread performance along its dollar curve. 

Temasek is almost five times larger than Khazanah in terms of assets with $193.73 billion in March 2015, according to RAM, compared to Khazanah's $44.44 billion at the end of December 2014.

The triple-A rated credit raised €1.1 billion from a split six- and 12-year deal in the name of Temasek Financial after building up a combined order book of  €2.15 billion, split €1.25 bilion for the six-year tranche and €900 million for the 12-year. 

This was not overly large relative to the kind of demand other triple-A rated European entities attract, but was still a reasonable enough coverage ratio given the tight pricing and lack of name recognition. 

Final pricing for the €600 million six-year tranche came at 99.336% on a coupon of 0.5% to yield 0.613% or 48bp over mid-swaps. It wsa initially marketed at 55bp to 60bp over. 

Deal stats show that by geography Germany took 23.5%, other Europe 17.5%,  the UK 14.3%, Switzerland 9.1%, France 8.9%, Netherlands 6.6%, Portugal 3.7%, Asia 12.5%, Middle East 2.5%, offshore 1.3%.

By investor type fund managers took 47.6%, other 15.8%, central banks and agencies 15.4%, insurers and pension funds 12%, banks 6.2% and private banks 3%. 

The €500 million 12-year tranche was priced at 99.913% on a coupon of 1.5% to yield 1.508% or 80bp over mid-swaps. It was initially marketed at 80bp to 83bp over. 

By geography 48.9% went to Germany, 18.6% to France, 7.4% to Switzerland, 6.5% to other Europe, 16% to the UK and 1.6% to Asia. 

By investor type insurers and pension funds took 58.6%, fund managers 35.2%, banks 2.9%, private banks 1.6% and other 1.7%. 

Temasek's closest foray in European waters came in 2010 when it raised $1.07 billion in sterling bonds. This was trading Tuesday on a mid-price of 117.88% to yield 62.4bp on a G-spread basis and 54.2bp on a Z-spread basis.

The remainder of its international bond portfolio is in dollars.

Two key comps were its 4.3% 2019 bonds and 2.375% 2023 bonds. The former was yielding around the 1.82% level on Tuesday, equating to a Z-spread of 83bp, and the latter at 2.25% on a Z-spread of 91bp. 

Both have been on a tightening bias since the end of December when the 2023 was quoted around the 2.75%. 

According to its website, Temasek currently has $9.75 billion outstanding.

Joint bookrunners for the deal were Barclays, Citi, Deutsche Bank and HSBC.

This story has been updated since first publication with final deal statistics. 

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