A pair of first-time issuers tapped the high-yield bond market on Wednesday, with warehouse and distribution centre operator ESR selling a $100 million unrated perpetual bond and the Republic of Maldives raising $200 million from a five-year note.
The demand for the two Reg S offering was tepid, as investors turned cautious ahead of the next meeting of US Federal Reserve policymakers in mid-June. The prospect of the US central bank raising short-term interest rates at its June meeting has jumped to over 90% from about 50% two months ago, according to CME FedWatch.
“Yield on 10-year US Treasuries dropped below 2.3% as investors look ahead of the payroll numbers on Friday to gauge the outlook for interest-rate moves by the Fed in June and beyond,” a Singapore-based fund manager told FinanceAsia. “The two deals yesterday paid a decent pickup over other credits in the market, but you have to bare their higher credit and duration risks.
“Trading was largely muted in a week with light trading volume and an absence of blue-chip names in the market,” the investor commented.
ESR, a privately listed logistic company controlled by US private equity firm Warburg Pincus, received $300 million of orders at peak level, according to a syndicate banker running the deal. The Republic of Maldives did not provide any book update by the time of publication.
ESR's hybrid security was priced at par to yield 8.25%, which was unchanged from its initial price guidance in the 8.25% area on Wednesday morning. If the issuer decides not to redeem the bond on its first call date, June 7 2020, the coupon on the notes will be reset to an initial spread of 681.5bp plus the prevailing three-year US Treasury yield, as well as a 500bp step-up.
“The book composes of a mix of private banking accounts and some institutional money,” a syndicate banker said.
In terms of fair value, there was no direct comparables in the market, but bankers used Fullerton Health’s recent $175 million 7% perpetual bond as one of the benchmarks. The unrated note, callable in April 2020, was quoted on a bid price of 100.375 to yield 6.85% on Wednesday morning.
They also pinpointed Hong Kong Airlines’ $250 million 7.125% hybrid note as a second reference. The note, callable in July 2020, was trading on a bid price of 98.625 to yield 7.62% on Wednesday morning, a syndicate banker said.
Both Fullerton and Hong Kong Airlines are unrated with a 500bp stepup for their perpetual bonds.
On Thursday morning, the ESR perpetual bond was trading higher in the secondary market, trading on a cash price of 100.2/100.6, according to market data.
The company plans to use the proceeds to refinance some of its existing borrowing, as well as for finance acquisition and investment opportunities, working capital requirements and general corporate purposes.
Joint global coordinators on the ESR deal were Credit Suisse and DBS, while HSBC was a joint bookruner.
Maldives’ maiden push
The low-lying islands state debuted a dollar denominated bond that pays a yield of 7% to investors, with Bocom International as the sole global coordinator of the five-year transaction.
The single-B-rated sovereign issuer pitched initial price guidance in the 7% area, and essentially priced the bond at the same level without moving the guidance tighter.
The bond was largely sold to Asian investors, apart from 17% that went into European accounts. By investor type, asset managers took 85% of the deal, with banks and private banks taking 10% and 5%, respectively.
Moody’s said the country’s B2 rating reflected its poor economic, government, financial and institutional standards, and moderate susceptibility to event risk. The country was hit by the devastating tsunami after the 2004 Indian Ocean earthquake, which killed more than 80 people there.
According to an official at the Treasury Department, Maldives wants to diversify its funding source by reaching out to institutional emerging market investors, setting up benchmark pricing curves for the country’s future issuance in the offshore markets.
The country plans to use the proceeds to ramp up its infrastructure projects, including a new runway of the Maldives' main airport.
“For the time being, we don’t have any immediate need for capital funding this year,” Saruvash Adam, head of Fiscal Affairs Division at the Ministry of Finance and Treasury, told FinanceAsia in a phone interview. “Our maiden dollar bond sale means to establish long-term relationships with the banks and investors globally.”
“In contrast to public query over whether this is a Chinese-led deal, we have captured a meaningful participation from institutional investors in London, Singapore and Hong Kong,” a person familiar with the debt sale said. “In addition to the investor roadshows conducted in Hong Kong, Singapore and London, some investors visited the country’s infrastructure facilities and met key government officials, showing their keen interest in the maiden issuer.”
The final order book was unchanged from the peak level and settled at $480 million, the person said.
The story has been updated with comments from a maldives official and a market participant familiar with the transaction