PMB: new deal, same old story?

Will the Malaysian government-owned agency heed history as it prepares to make its third attempt to debut in the international debt markets?
For the third time in as many years, Malaysian sovereign proxy Penerbangan Malaysia (PMB) is hoping it will finally be able to make its debut in the international debt markets. Earlier this week, the wholly government-owned agency added Morgan Stanley to an existing CIMB and Deutsche Bank mandate to raise $1 billion via a 10-year bond.

Market participants are now waiting to see whether the A3/A- sovereign rated issuer has learnt from past mistakes and will bring a market clearing deal. So far it has failed twice û in 2003 after it mandated Credit Suisse and Morgan Stanley for a deal that never saw the light of day and in October 2005 when a CIMB, Citigroup and HSBC transaction completely unraveled.

At issue has always been what premium PMB needs to pay above the sovereign.

Theoretically, most observers agree that PMBÆs fair value should lie up to 5bp above the sovereignÆs dollar bond curve. This is based on the fact that the credit is not pure sovereign risk, but does have an extremely strong guarantee making it a good sovereign proxy.

In the event of a default, its bond would not be accelerated thereby exposing investors to duration risk. Instead the sovereign itself would be substituted as the ultimate issuer, meaning investors would only fail to get their money back if Malaysia itself defaulted.

However, in practice many market participants believe a debut PMB deal needs to price at least 10bp clear of the sovereign. The size of this premium has grown in tandem with each failed attempt to access the markets. Many believe the groupÆs difficult history in the international capital markets has clearly left investors with the upper hand.

PMBÆs attempt to raise $1 billion from a 10-year deal last October, started to go wrong from the outset. The leads went out with price guidance, which was too tight and the order book failed to generate momentum. Guidance is said to have been aggressive because PMB felt it deserved to price on top of state-owned oil giant Petronas and had not grasped the concept of going out with wide guidance in the hope of building momentum and leveraging it back in.

But even were PMB to have gone out with wider guidance, few would have been willing to bet on it achieving parity pricing with Petronas. Firstly, Petronas has a longstanding relationship with investors and an established track record.

Secondly and more importantly it is rated two notches through the sovereign ceiling by MoodyÆs. The group has an A1/A-/A- rating (MoodyÆs, S&P, Fitch) versus an A3/A-/A- sovereign rating

Thirdly, Petronas outstanding 2015 deal was trading at a technical tight that did not reflect the clearing levels of a new deal, which would also probably have needed some sort of new issue premium.

All these factors meant the book failed to generate momentum and ended up being populated with a lot of domestic accounts, many of them government-owned. This triggered a debate about whether these accounts needed to be disclosed in the documentation.

The government was said to have resisted this because it would set an unwelcome precedent. International investors were also concerned about the presence of so many domestic accounts, fearing they would rapidly sell out in the secondary market and pressure spreads.

After trying to tempt investors with the sweetener of a 30-year deal, the whole exercise was scrapped.

Some market observers believe history is now starting to repeat itself. Controversy blew up late last week after PMB solicited new bids from a group of banks and subsequently appointed Morgan Stanley to join CIMB and Deutsche.

Market observers interpreted this move as evidence of difficulties soft marketing the deal among investors. This in turn re-ignited earlier speculation that Deutsche had won the mandate in the first place by pitching an overly aggressive backstopped bid.

This was said to have been flat to PetronasÆ secondary market levels. Unrealistic pricing proposals are frequent feature of AsiaÆs hyper competitive debt capital markets.

In this instance, some believe PMB soon realized it was heading down the wrong path and decided to bring a new bank onto the mandate to enhance the syndicateÆs distribution firepower.

A second interpretation is that PMB always intended to include a second international bank once CIMB and Deutsche had done the preliminary due diligence. If this is the case, the borrower certainly did not handle the process very well.

The key issue now is what price guidance the leads go out with. Malaysian spreads have tightened considerably since October and many investors may be wondering what upside is left.

Back in October, for example, the Petronas 7.75% August 2015 bond was bid at about 28bp over mid-swaps, although bankers say the non-technical level should have been in the low 30Æs. Now the bond is bid at 19bp over.

The sovereign itself does not have a comparable 10-year. Its most recent deal is a 7.5% July 2011 deal. This is currently bid around 13bp over mid-swaps.

A 7% May 2012 deal by Petronas is currently said to be bid around 20bp over mid-swaps. This means the Petronas 2012 bond is currently trading about 6bp to 7bp over the sovereign's 2011 bond on a like-for-like basis. However, a number of analysts believe the Petronas curve between 2012 and 2015 is too flat.

Other comparables include Telekom Malaysia, which also pierces the sovereign ceiling with an A2 rating from Moody's and the sovereign A- rating from Standard & Poor's. Its 8% December 2010 bond is currently bid around 25bp over mid-swaps.

At the other end of the sovereign proxy curve, Baa1/BBB rated TenagaÆs 7.625% April 2011 deal is trading at about 31bp over.

As one banker concludes, ôThis time round itÆs imperative PMB learns from past mistakes and executes a truly market driven deal. The last thing it should try and do is rip every last basis point off the table.ö

PMBÆs major asset is a 69% stake in Malaysian Airlines, one of AsiaÆs worst performing airlines. In the second quarter of 2005 (July to September 2005), MalaysiaÆs national carrier booked a loss of M$368 million. According to analystsÆ research, the group is also forecast to see a spike in gearing from 325% to a staggering 616% in FY2006.
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