A $300 million euro-144a issue priced last night (Wednesday) in New York, represents LG Caltex's first fixed-rate bond issue since the Asian financial crisis and the first corporate Korean transaction to move out to the 10-year level since then, too.
Led by Credit Suisse First Boston, books closed at about $410 million and led to pricing at 98.712% on a coupon of 7.75% and yield of 280bp over Treasuries. For the July 2011 transaction, this represented the outer end of final price talk at the 275bp to 280bp level and reflected enormously difficult conditions in the wake of Argentina's political problems and PCCW-HKT's large and ever looming shadow.
For the lead, it meant striking the right balance between an investor base, unnerved by widening emerging market spreads and, a company aware that Korean spreads have remained relatively resilient. In general, observers say that there was less reliance on the Asian investor base, partly because of the 10-year maturity and the energy sectors greater appeal to US investors and partly because Asian accounts have been feeling the pressure of EMG-inspired turmoil all week.
Breakdowns show that US investors took 59% of the bonds, with Asian investors 38% and European investors 3%. Asian distribution was led by Singapore on 36%, followed by Hong Kong on 32%, Korea 22% and elsewhere 10%. A total of 40 investors are said to have participated, with 10 anchor orders coming in above the $10 million mark.
By account type, insurance funds are said to have taken about 42%, funds 41%, banks 11% and other (mainly private banking) 6%. Of this number, only about four to five investors already held LG Caltex paper and only 25% of the total constituted emerging market funds. Most are believed to have placed the bonds into their energy portfolios.
"US fund managers like the deal because it offers such a great pick-up to domestic triple-B oil comps which tend to trade around the 180bp to 220bp mark," comments one observer. "US investors are generally very comfortable with the energy sector and particularly with this company, because it's a 50/50 joint venture with a US oil major. Chevron will end up owning half of this company once its merger with Texaco is complete."
In terms of Asian benchmarks, the deal came through where it could have been expected to price relative to Petronas and on top of what would have been expected relative to Kepco. Malaysian spreads in particular have been hard hit by the markets soft tone. The recent sovereign 2011, for example, priced at the beginning of July at 228bp over Treasuries and was out to 285bp bid at its widest on July 13.
Baa2/BBB-rated Petronas, which has a one notch higher rating than LG Caltex from Standard & Poors, has a 2015 bond trading at 290bp/280bp as of Asias close Wednesday. Historically, BBB-/Baa2-rated LG Caltex has tended to trade about 40bp wider and accounting for the differences in maturities and need for a slight new issue premium, has, therefore, come about 15bp to 20bp tighter than expected.
By contrast, Korean spreads have been the least affected by recent volatility and although corporate spreads have been marginally hit, semi-sovereign credits such as Kepco have benefited from a flight to quality. Rated one notch lower than LG Caltex by Moodys, Baa3/BBB-rated Kepco has 2013 bond outstanding. It ended trading yesterday at 229bp/209bp. Traditionally, the oil company has traded about 25bp outside of the electricity utility. Taking into account a 20bp differential on the yield curve for the additional two years, LG Caltex has come about 6bp wide of Kepco, but flat if a new issue premium is also taken into consideration.
Seoul-based bankers attribute the firmness of Korean spreads to a very strong domestic bid from banks with excess Won liquidity and asset managers looking for a yield pick-up over domestic comparables. "Even taking the basis swap into account, a domestic fund manager could probably pick up about 40bp to 50bp if a deal is swapped back into Won," says one banker. "Domestic insurance funds would also like a deal like this because most domestic corporate bonds are clustered around the three to five year mark."
Bankers also estimate that LG Caltex has priced about 30bp to 35bp inside of SK Corp on a like-for-like basis. Koreas largest oil refiner has a Baa3 rating from Moodys and a five-year bond outstanding at 270bp bid. LG Caltex has consequently secured an extra five years in maturity for a mere 10bp pricing premium.
One of the reasons it has been able to do so results from a debt reduction programme undertaken since 1997 when the company had W4.5 trillion ($3.5 billion) in debt outstanding. Despite being a massive dollar earner, LG Caltex was severely spooked by the financial crisis, which saw many of its bank lines withdrawn and forced Caltex Corp to provide $500 million in liquidity support.
Since then, it is has worked hard to bring debt down to a W1.8 trillion ($1.37 billion) level as of 1Q 2001. In tandem, debt to EBITDA has fallen from 5.9 times in 1996 to 1.9 times in 2001. By contrast, SK Corp reported debt to EBITDA of 4.4 times in FY 2000.
"This is not a company that needs to raise debt," an observer concludes. "But it is one that's keen to lengthen its maturity profile."
With only 16% in short-term debt and only 23% denominated in Won, the vast bulk of LG Caltex's outstanding liabilities are five years or longer. Of the W1.8 trillion total, some W650 billion falls due after 2006.
Alongside the lead, Deutsche Bank and Goldman Sachs were joint-leads, with ABN AMRO and LG Securities as co-managers.