The 10-year deal, which was lead managed by JPMorgan and Salomon Smith Barney, was upsized from $750 million to $1 billion on the back of spectacular demand, especially from the US where 54% of the demand originated from. Indeed, this overturned a trend in which Asian demand had driven most Asian deals this year, in the case of the China deal, making up 50% of demand. In Malaysia’s case, the Asian order book reached $600 million, far shy of the US although greater than the $300 million derived from Europe. About 30% was placed in Asia and 16% in Europe.
The deal’s popularity with US investors might surprise some, as the Malaysian premier (and recently-anointed finance minister) Mathathir, is not a hugely popular figure with US investors. Moreover, he has a fairly equal disdain for them, having recently launched another broadside at foreign capital at the UMNO assembly.
What probably attracted so many US investors to the deal was its pricing. It came at 228bp over treasuries which was roughly 70bp wide of the similarly-rated Korean 2008s.
As one rival bankers points out, the original price talk was at 235bp over, which was “extremely cheap”, although the leads managed to rein in the pricing in the ensuing 24 hours to 228bp which was described as “roughly fair in the conditions”.
What puzzles rivals is why Malaysia chose to do a deal at this time. Three months ago, Malaysia’s 2009s were trading 15bp-20bp through Korea’s 08s. In the last quarter, spreads have moved against Malaysia by about 90bp.
The reason for this astounding shift were threefold. Most significantly, S&P changed its outlook from positive to stable, sending out the signal that Malaysia might suffer most in Asia from a US economic downturn. As a result, Malaysian spreads began “falling like a stone” at the beginning of April as this -- and concerns about a devaluation -- spooked investors. The Mahathir factor – his decision to become finance minister, and the absence of a successor to the 75 year old leader – did not help.
So why issue now?
Malaysia clearly took the view that the present interest rate cycle was reaching bottom and may have even decided that if it waited, its economic picture might look worse. Malaysia’s economy is highly correlated with the US, and bankers say a rise in NPLs in Malaysia’s banks looks likely.
And vis-a-vis the Korean spreads, it needs to be said that the comparison is becoming a little artificial. That’s because the Korean 2008s are now being aggressively asset-swapped back into floating rate won assets by Korean banks, all of which are fighting a battle with excessive won liquidity. This asset swapping is making the 2008s more illiquid and forcing them to trade tighter.
In total, the deal received 160 orders, with tickets ranging between $2 million and $100 million.
The deal’s most crucial moment was at 7am on Thursday (Asian time) when the leads had a conference call with the Malaysians to discuss whether to go ahead. The FOMC had just cut interest rates by 25bp, but this was less than the 50bp the market had been expecting and the Malaysians were asked if they wanted to go ahead with sentiment so uncertain.
At this stage, the leads were talking about a $750 million deal, and by Friday morning they were able to bring the price talk into 230bp over. As the day went on, pricing tightened 2bp further and the outstanding demand led to the deal being upsized by a further $250 million.
From Malaysia’s perspective, the absolute coupon it paid for its $1 billion looks healthy. Says Salomon’s head of debt capital markets, Stephen Roberts: “The previous Malaysian 08s had an 8.75% coupon and this was 110bp inside that. Malaysia was doing a deal because the absolute level was attractive.”
The borrower was slightly unfortunate, however, in that US treasuries backed up over the course of the week, ending Friday at 5.41% having started the week at 5.13%.
Whether the absence of a roadshow helped or hindered Malaysia is a point contested by bankers. Some say a roadshow would have helped to bring out the ‘hidden gem’ aspects of the Malaysian story. “Whatever anyone thinks about the politics, they do have a lot of natural resources,” says one banker.
However, the Malaysians had a bad experience with a roadshow two years ago when the market totally moved against them and last year they eschewed the roadshow process with a re-opening. Besides, with Mahathir as finance minister, it’s difficult to see who could have gone on a roadshow.
Overall the leads feel that even without a roadshow, their strategy ensured the deal blew out. Says Roberts: “We went out at 235bp over and as a result of the strong Asian bid and European demand we tightened to 230bp over, and finally priced at 228bp. Our strategy – in the absence of a roadshow – was to start with pricing that was on the generous side of fair and then drive in the pricing as the demand picked up, which is what we did.”
And says Marc Jones, JPMorgan co-head of debt capital markets: “We were delighted by the support for the deal, which saw good demand both by region and by investor type.”
