Petronas launches $4.5 billion jumbo bond

Malaysia's state-owned oil company Petronas raises the stakes for Asian borrowers by issuing five-year sukuk and 10-year conventional bonds that attract orders worth nearly $20 billion.

Petronas (Petroliam Nasional Bhd) has upped the stakes for Asian borrowers in the international capital markets with a $4.5 billion two-tranche deal, split between 10-year conventional notes and five-year sukuk certificates.

It was the second largest international issue from an Asian (ex-Japan) borrower since Hutchison Whampoa's $5 billion deal in 2003, and the sukuk tranche matched the biggest ever Islamic bond-like issue by Dubai Ports in 2007.

The 144A transaction attracted huge demand from investors worldwide, with an order book amounting to nearly $20 billion, and more than 500 investors receiving allocations by yesterday afternoon. It was priced late on Wednesday, New York time.

The $3 billion 10-year notes pay a semi-annual coupon of 5.25% and were re-offered at 99.447 to yield 5.322% to a maturity date of August 12, 2019. That translated into a spread of 162.5bp over the yield of the 10-year US Treasury benchmark bond. The issuing vehicle was Petronas Capital Ltd, guaranteed by Petronas.

The $1.5 billion sukuk was issued (by Petronas Global Sukuk Ltd and also guaranteed by the parent) at the same 162.5bp spread over the five-year US Treasury note, pays a coupon of 4.25%, and was re-offered to investors at 99.871 to yield 4.278% to a maturity date of August 12, 2014.

According to the structure of the sukuk al-Ijara certificates, wholly-owned subsidiaries of Petronas will sell sukuk assets to the Petronas Global Sukuk SPV, which will buy those assets from the proceeds of the sale of the certificates and then lease them to Petronas, which will pay out so-called rental proceeds. It is, by now, a well-established sale-lease back arrangement and the most common form of sukuk structure.

Holders of both tranches will be able to redeem their bonds or certificates at par if the Malaysian government reduces its holding in Petronas below 51% or in the event of a debt cross-default of more than $100 million.

Initial price guidance last week had centred around 175bp (plus or minus an eighth of a percentage point) over the respective US Treasury yields for both tranches. According to sources familiar with the transaction, most investors were cash buyers, although there had been some switching out of existing illiquid Petronas bonds.

Yet, those rarely traded issues provided the benchmarks for pricing the new deal. A sometimes active Petronas 2022-dated bond was bid at 160bp over the US Treasury yield and the company's 2015 issue was nominally bid at 165bp shortly before the launch of the new deal.

But perhaps more relevant comparisons were found from recent bonds issued by oil and gas companies elsewhere, such as ConocoPhillips (rated A1/A) which was trading at 120bp over US Treasuries. Importantly, Petronas had scarcity value and was propelled by a tremendous rally in Asian credit markets, which has seen average investment grade spreads tighten from over 800bp in October 2008 to around 330bp.

Both tranches are rated A1 by Moody's and two notches lower by Standard and Poor's at A-, and are subject to English law.

The joint bookrunners, Citi, CIMB and Morgan Stanley had set out with a minimum $2.5 billion deal size and arranged extensive roadshows with Petronas officials, starting in Kuala Lumpur, Hong Kong, Singapore and London last week, Dubai and Abu Dhabi at the weekend and ending in the US on Wednesday.

Asian investors were the main buyers of the sukuk, taking 47% and Malaysian accounts took an additional 13%. The rest was split 27% to Europe, 7% to the Middle East and just 6% to the US, which seems to continue to struggle with anything that has an Islamic label.

US investors were more enthusiastic about the 10-year conventional notes, buying 25% of them, while 39% was placed in Asia, 4% in Malaysia, 31% in Europe and 1% in the Middle East.

Asset managers were the biggest buyers of both, taking 40% and 61% of the five-year and 10-year tranches respectively. Commercial and private banks were allocated a combined 46% of the sukuk, and the balance of the conventional paper was evenly distributed among banks, insurance companies and pension funds.

In after-market trading yesterday, both new issue tranches were 5bp to 7bp weaker in line with generally softer credit markets.

Petronas is 100% owned by the Malaysian government and has operations that span upstream oil and gas exploration and production, and downstream oil refining, marketing and distribution of petroleum products. The company reports directly to the prime minister and has exclusive control over Malaysia's hydrocarbon basins and is an integral part of the government's energy policy and other spending and investment plans.

According to a July 28 report by S&P, Petronas has high capital expenditure requirements, but its liquidity is strong and largely denominated in ringgit. The company's rating is "highly influenced" by the sovereign's performance "in view of the integral link with the government and the company's critical role in managing the country's oil and gas infrastructure and implementing the national energy policy", it said. Crude oil prices have risen by 61% this year due to expectations about a global economic recovery.

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