Petronas in $5b blockbuster bond issue

Malaysian national oil giant prices Asia's second largest corporate dollar bond, comprising of an Islamic and three conventional tranches.

Malaysia's state oil company Petronas made a splash on Thursday with Asia's second-biggest corporate dollar bond issue, raising $5 billion with its first international deal in just over five years, though lower than the anticipated $6 billion to $7 billion.

The A1/A rated multi-tranche note includes both Islamic and conventional structures and was snapped up by investors despite a backdrop of weak global oil prices and domestic financial scandal due to problems at 1Malaysia Development Berhad, an indebted and state-backed investment firm.

As a result, Petronas was able to price Asia's biggest corporate dollar bond issue since Alibaba Group, China's online behemoth, sold $8 billion-worth of notes in November.

“Petronas is Malaysia’s most important state-owned enterprise, with a rock-solid stand-alone financial profile, even accounting for the fall in oil prices,” said Mark Reade, a Hong-Kong based fixed income analyst at Mizuho Securities.

“Although we don’t rule out further oil price weakness, we take some comfort from our view that such weakness will be supply- not demand-driven, which in turn should see oil prices ultimately rebound," he said.

Petronas's 144A/Reg S offering, which comes off the back of Petronas's global roadshow that ended Tuesday, comprises a $1.25 billion five-year sukuk and $750 million seven-year, $1.5 billion 10-year and $1.5 billion 30-year conventional bonds, according to a source close to the deal.

Part of a $15 billion medium-term note programme, the seven-, 10- and 30-year conventional notes priced at Treasuries plus 130bp, 150bp and 190bp, tighter than their initial price guidance levels of 150bp, 175bp and 220bp respectively. All the tranches were issued by the subsidiary Petronas Capital and guaranteed by parent company Petroliam Nasional.

The Islamic tranche — raised via a special purpose vehicle Petronas Global Sukuk — meanwhile, priced at Treasuries plus 110bp, which is 25bp tighter than the initial price guidance area. 

Orderbooks reached over $12 billion from 770 accounts, according to a source familiar with the matter. 

Challenging times

Falling oil prices and the concerns surrounding 1MDB have sent jitters across the Malaysian credit space.

Malaysia's credit default swaps — the cost of insuring the nation's sovereign debt against default — reached a 16-month high in January after reports of a missed bond payment by the Malaysian government-owned investment firm, according to Bloomberg data.

Credit analysts also expect Petronas’s profitability to take a hit in 2015 given that Brent crude oil has tumbled from over $100 a barrel last year to about $56 per barrel now.

However, the company’s fourth quarter performance in 2014 remained fairly resilient thanks to a concurrent depreciation of the Malaysian ringgit, which helped to partly offset the decline in the global dollar price of crude. The Malaysian currency has weakened by 14% in the last six months, according to Bloomberg data.

Standard & Poor’s projects that the company's Ebitda could decline to about M$55 billion ($14.9 billion) to M$65 billion in 2015, from close to M$125 billion in 2014.

However the rating agency expects the company to maintain above-average profitability in the long-term.

“Our view is based on Petronas's substantial diversification into gas, whose pricing is less volatile than crude oil, and some diversification into downstream refining and petrochemicals, which tend to have more stable margins,” Xavier Jean, a Singapore-based credit analyst at S&P, said.

Also, the likelihood of support from the Malaysian government is very high, given the national importance of Petronas and its strategic role in the country's economic development. The petroleum sector currently contributes more than 30% of total federal government revenue.

Expensive investment

The nearest comparables for Petronas's seven-year offering are its own outstanding 7.875% bond and Aa3/AA- rated China China National Offshore Oil Corporation’s (CNOOC) 3.875% bond, which expire in May 2022. Prior to announcement of the new bond, these traded at a G-spread of 159bp and 147bp, respectively, a source close to the deal told FinanceAsia.

For the 10-year tranche the nearest comparables are Petronas’s 2026 7.625% bond, CNOOC’s 2024 4.25% bond, and Baa2/BBB- rated India oil and gas company ONGC’s 2024 4.625% note, which  traded at a G-spread of 165bp, 155bp and 185bp, respectively.

In the case of the 30-year bond, the closest comparables include CNOOC’s 4.875% 2024 bond, Baa2/BBB+ rated Reliance Industries’ 4.875% February 2045 note and Aa3/A+ rated Korea Gas’ 6.25% January 2042 offering that were trading at a G-spread of 168bp, 260bp and 120bp, respectively.

“That doesn’t look overly generous versus Petronas’s existing curve and on a pure risk-reward basis, we think the deal looks rich versus the three-notch higher-rated CNOOC [bond],” said Mark Reade, fixed income analyst at Mizuho Securities. 

“So for [credit] investors looking for long-dated oil and gas exposure and for whom diversification away from China is not a driving factor, we suggest using today’s move wider in China oil and gas — post the US Treasury rally and Petronas’s launch — as an attractive entry point for CNOOC, China National Petroleum Corporation and Sinopec,” he added.

Islamic features

The company’s Islamic bond is structured under a sukuk al-wakalah format, which is a contract whereby a party authorises another party (the special purpose vehicle in this case) to act on its behalf based on agreed terms and conditions.

Under this agreement, the SPV will enter into an ijarah, or lease financing, contract for at least 33% of the issued amount, and a murabahah, or sale financing, for at most 67% of the issued amount, with Petronas, according to a source familiar with the matter.

Under the ijarah contract, Petronas will enter into an asset sale and leaseback arrangement with the SPV at the issuance date. Rental paid by the Petronas will service the periodic distribution amount, or coupon, of the Islamic bond. At maturity, the company will then buy back the assets from the vehicle at the same price.

For the latter arrangement, the SPV will purchase commodities and sell them to Petronas at the issuance date. Petronas will then defer the payment for these commodities until the maturity date, which essentially is the principal payment.

Proceeds obtained from the bonds will be used for general corporate purposes, added the source.

The last time Petronas sold US dollar notes was in August 2009, when it issued $4.5 billion of bonds.

Petronas is an integrated oil and gas company wholly owned by the Malaysian government. It has operations spanning upstream oil and gas exploration and production, downstream oil refining, marketing and distribution of petroleum products, as well as oil and petroleum products trading.

Bank of America Merrill Lynch, CIMB, Citi, JP Morgan and Morgan Stanley were the active bookrunners of Petronas’ deal. The passive bookrunners were Deutsche Bank, HSBC, Maybank and Mitsubishi UFG Financial Group.

This article has been corrected to show that the Islamic tranche wasn't dropped due to weak market conditions as earlier reported

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