Market to wait a while longer for Tenaga's debt tender

Roadshows for Tenaga''s mooted debt exchange are not likely to start for at least another week.
Having initially expected presentations to begin in Hong Kong yesterday (Wednesday), investors say that they are not now likely until the week after next since there has been no sign of an SEC filing. HSBC and Lehman Brothers are said to be joint lead managers of a simultaneous tender offer and new bond issue for the Malaysian electricity utility.

Investors canvassed about the tender report that the Baa3/BBB-rated credit is planning to include its $600 million 7.875% June 2004 bonds and its $300 million 7.2% April 2007 put April 2002 bonds. Since the company is trying to term out and ultimately reduce its foreign currency denominated debt, it will not want to raise new money and is thought likely to cap the new issue at $900 million. Analysts also say that because of Malaysia's currency devaluation in 1998, which pegged the ringgit at M$3.8 to the dollar, Tenaga is particularly keen to avoid redeeming the 2002 bonds, although it has provisioned for any potential foreign exchange loss.

Under the structure of most tender offerings, which are usually held open for 20 days, investors are offered a cash incentive to tender their bonds. Simultaneous to the close of the tender, a new bond is launched, which in Tenaga's case, is said likely to comprise a 10-year security priced at a fixed spread over Treasuries.

Secondary market trading levels for Malaysia's top tier credits suggest that, should Tenaga manage to clear a 10-year deal without a new issue premium, it will be able to price at about 285bp to 295bp over Treasuries. The three most comparable recent benchmarks from the region: MTR Corp's $600 million offering of early November, Telekom Malaysia's $300 million deal of early December, and Hutchison Whampoa's $1.5 billion issue of mid February, were all priced without new issue premiums following a strong primary market bid from regional investors.

Since the company lost is sovereign ceiling rating from Moody's late last year, its secondary spreads have widened relative to Petronas and Telekom, which tend to trade in line with each other and about 40bp behind the Baa2/BBB-rated sovereign on a like-for-like basis.

Tenaga's benchmark April 2007 bond is currently trading at a bid/offer spread of 245bp/235bp over Treasuries, while the most comparable benchmark from Petronas - its October 2006 - is at 203bp/193bp, a roughly 40bp differential.

At the 10-year level, where Tenaga is planning to launch the new bond, there are two comparables. A June 2009 bond from the Federation is currently bid at 208bp, while a December 2010 by Telekom is bid at 253bp. To clear its own 10-year, Tenaga would, therefore, need to come about 40bp cheap to Telekom. This also reflects the fact that there is about 10bp per annum on the Malaysian credit curve. Relative to its existing 2007 bond, this would price a new 2011 bond at 285bp to 290bp over.

In marketing the deal, analysts comment that the company is likely to follow the example of Telekom, which positioned itself as a sovereign rather than a telecom play. As one head of fixed income research puts it: "It's a harder argument to make for Tenaga because it doesn't have the full sovereign rating any more. But the fact is that this is how investors will analyze and buy it. They will take a top down approach."

Success will consequently turn on investors' view of Malaysia and its position within Asia's sovereign credit spectrum. Throughout 2000, the country was viewed as a defensive play and performed strongly, even outpacing similarly rated Korea, which analysts have argued was penalized for a constant flow of negative news.

In its Credit Monthly for February, Merrill Lynch also noted that there has been a polarization of Asian credit spreads to the detriment of high yield credits and benefit of higher rated sovereign and related credits from China, Hong Kong, Singapore, Malaysia and Korea. "As Asia's cycle turns down," the report concludes, "we place even greater emphasis on investment-grade issues, a strategy we have held over the past few months. The performance gap between high-grade and high-yield sovereign bonds - with a spread differential of around 500bp compared with less than 200bp a year ago - is unlikely to narrow in the near term."

Other analysts, however, have begun to argue that while Malaysia should remain attractive, investors may begin to show more differentiation between Asia's highest ranked credits this year. "We are slightly less optimistic about Malaysia," a second fixed income research head comments. "The country's growth has been almost exclusively export driven and this will be affected by the US slowdown. Malaysia also benefited from the fact that its currency was pegged at an undervalued level when other regional currencies were strengthening. Many are now showing signs of weakness, which will put further pressure on exports."

For Tenaga, roadshows will give the company's new chairman, Jamaludin Jarjis, an important platform to re-present a credit, which has been negatively impacted on a standalone basis by Petronas' plans to increase the price of gas it sells to Tenaga by 20%. Investors will also be keen to hear why the company wants the government to halt further deregulation of the domestic electricity industry in the wake of the Californian power crisis.

Indeed, some analysts believe that Tenaga will be the main beneficiary if the government heeds the lesson from California, where domestic electricity companies were pushed to the brink of bankruptcy after local authorities capped electricity rates, but set no limit on how much they had to pay for the power needed to generate electricity in the first place.

With total debt of $6.956 billion as of year-end August 30, Tenaga ranks as one of Malaysia's biggest public, foreign currency borrowers. Debt to EBITDA stood at 6.28 times as of end August, while gearing was at 195%. However, since about 30% of the company's borrowings are denominated in yen, it has recently recorded foreign currency gains.

In the quarter ended November 30, for example, it netted a foreign currency gain of M$211 million ($55.5 million), compared with a loss of M$711 million over the same period the previous year.

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