Led by Barclays Capital and Deutsche Bank, an Eu500 Million ($428 million) five year deal was increased to Eu650 million on the back of a strong order book, which was all but closed after demand topped the Eu1.25 billion mark.
Priced at 99.510%, the deal pays an annual coupon of 6.37% to yield 102bp over the mid euribor swap rate. Co-managers, receiving no bonds under the pot system used to distribute the deal, comprise ABN AMRO, CIMB, Dresdner, HSBC, JP Morgan and Salomon Smith Barney. Fees total 35 cents.
Compared to Malaysia's dollar spreads against which it will be judged, the transaction has come at a premium of up 30bp depending on varying opinions to where a five year Malaysian dollar deal should price. At 102bp over Euribor, the deal has an equivalent launch spread of 149.5bp over Bunds, or 215bp over in Treasury terms. At the time of pricing, Malaysia's outstanding $1.5 billion 8.75% 2009 transaction was trading at 225bp bid, having been fairly range-bound over the past week.
Bankers looking at the deal in Libor terms believe that the new issue has come almost flat to dollar levels, even after the maturity differential is taken into account. As one puts it, "The Malaysia 2009 is trading at about 120bp on a Libor-equivalent basis. Since there is about 12bp to 15bp on the swap curve at the moment, this would price a 2005 at about 108bp/110bp."
Others, however, contend that although the treasury and swap curves are flat, the credit curve is not. "If you look at, say, the Korea 2003 and 2008, there is about 70bp between them, which averages about 14bp per annum," one Asian DCM head argues. "If we take a more conservative figure and use 10bp per annum, this would still price a Malaysia 2005 at about 185bp over Treasuries, 30bp inside of where it actually came."
Asian bankers, most of whom never thought that the Federation should have launched a euro-denominated deal in the first place, have taken this pricing premium as further evidence of a mis-guided strategy. "It's no wonder the deal was so successful when it comes at this type of premium," one of the country's most strident critics comments. "It's about as challenging as selling a heater to an eskimo, or ice cream to the Arabs."
Lead managers, on the other hand, re-iterate the country's desire to forge a new path for itself. "Malaysia always knew that it would have to pay a slight premium to dollar levels. There is no question that it's still necessary in Europe for most outside borrowers," says one London-based official. "But the government made a strategic decision that this is what it wanted to do and it has been very successful."
A second adds, "Malaysia had two main objectives. One was to tap a new investor base and the second was to set a benchmark for future borrowers from the country. It was a fantastic achievement, especially when you consider the overall market backdrop. There's been a lot of uncertainty in Latin America and particularly Argentina over the last few weeks, the Nasdaq has performed badly and the general situation with the US Presidential election is still overhanging the whole market."
A total of 125 tickets were counted in the final order book, of which four topped the Eu30 million mark. In terms of geographical distribution, allocations were heavily weighted towards Europe, which accounted for 63%, against 35% to Asia and 2% to offshore US accounts.
The European tally was further broken down into: 21% Germany; 18% the U; 6% Switzerland; 5% Italy; 4% France; 3% Benelux and; a further 6% to the Middle East. About 75% of buyers were said to be new to Malaysia and most of that number were also said to be new to Asia as well. To date, the region has only produced four euro-denominated transactions from: Hutchison Whampoa; the Republic of the Philippines; Korea Development Bank (KDB) and; Kepco, which was forced to re-purchase its deal as part of its restructuring programme.
KDB has outstanding 2005 transactions in both euros and dollars. The former deal is trading about 35bp to 40bp wider than Malaysia on the bid, while its outstanding dollar issue is currently quoted at a bid/offer spread of 240bp/220bp.
In terms of investor type, bankers say that strong demand enabled Malaysia to skew distribution away from asset swapping European banks into pure institutional accounts, most of which were buying the deal on an outright basis. "Asset managers and mutual funds were undoubtedly the largest buyers, but generally speaking there was a broad spread," explains one banker. "Pension funds, insurance funds, banks, retail intermediaries and retail buyers were all present, although retail accounted for less than 5%."
European investors were said to like the deal partly because it presented a rare opportunity to purchase Asian sovereign debt and partly because they were impressed by the improving economic outlook presented by Malaysia during roadshow presentations.
From a credit perspective, Malaysia is currently rated BBB/Baa2, with Moody's assigning a stable outlook and Standard & Poor's a positive outlook. The Republic of Korea, by contrast, also rated BBB/Baa2, is on positive outlook from both agencies. Many fixed income analysts expect S&P at the very least to upgrade Korea within the next three months.
HSBC's head of fixed income research, John Woods, believes that at this point, the spread differential between Korea and Malaysia may finally reverse itself. "At the moment there is still about 8bp to 10bp between them in Malaysia's favour," he says. "In the near term, we think this is because Malaysia is promoting growth over reform, while Korea is promoting reform over growth. Korea is getting marked down for any bad news that comes out of the country, but it has led the ratings upgrade progress across Asia and will continue to do so."
Other observers also comment that for European investors, Malaysia's deal was felt to offer a relative value play against Eastern European paper of comparable credit standing. Baa1/BBB+ rated Hungary, for example, recently re-opened a five year FRN at 22bp over Euribor.
For Asian investors, the main appeal is likely to be the potential for capital appreciation. "Consensus opinion suggests that at 86 cents to the dollar, the euro has reached its bottom," says one banker. "Under a soft landing scenario in the US and flat growth figures in Europe, the currency has to find a natural equilibrium. The appreciation potential is obvious."
"But likewise," he adds, "the issuer has opened itself up to inflated redemption risk and we are advising all our clients to avoid issuing in the currency for the time being."
Indeed, most conclude that Malaysia's entry into the euro markets has provided an ambiguous case study for other would be Asian borrowers. While the deal has shown that there is strong latent demand for paper by European investors, it also underlines the necessity for a slight pricing premium. For Asian borrowers with strategic considerations, the euro offers a funding alternative to dollars. But in a region where cost competitive funding reigns supreme and a love of dollars remains ingrained, it is by no means clear-cut that many will follow where Malaysia has led.