PTT flattens curve with $1.1 billion dual-tranche bond

Bring on duration: PTT's 10- and 30-year bonds price at the same spread reflecting strong investor demand for long bonds.

Thai oil and petrochemical company PTT issued a rare $1.1 billion dual-tranche bond late last week, which underscored once again the demand for long bonds. With rates near or at all-time lows, investors are looking for ways to pick up yield and long bonds allow them to do just that.

It is usually more expensive for companies to issue long-dated bonds, but PTT’s $500 million 10-year and $600 million 30-year bonds both priced at the same spread — at Treasuries plus 160bp, making it one of the few issuers that has managed to do so.

In April, Cnooc priced its $2 billion dual-tranche 10- and 30-year bonds at the same spread, while in May Sinopec priced its 30-year bond 25bp inside its 10-year bonds on a spread over Treasuries basis.

“We have seen a flattening of the curve — and in some cases, for some issuers, an inverted curve,” said a source. “For instance, Temasek’s 30-year bonds earlier this year came at Treasuries plus 95bp whereas its 10-year bonds came at Treasuries plus 100bp. This shows how much demand there is from investors for a yield pick-up for investment grade credits.”

This was PTT’s first US dollar bond offering since its last foray into the international bond market in July 2005, so there was scarcity value for the credit. However, PTT’s subsidiary companies — PTT Global Chemical (PTTGC) and PTT Exploration & Production (PTTEP) have both tapped the market this year.

The deal attracted a robust book — with $11 billion worth of orders chalked up in Asia alone. Some of these orders fell away when the company tightened guidance 40bp on the 10-year tranche and 50bp on the 30-year tranche.

At Asia open on Thursday, the initial price guidance for the new 10-year and 30-year was announced at the Treasuries plus 200bp area and Treasuries plus 200bp to 210bp, respectively. Given that PTT’s existing bonds due 2014 and 2035 are very illiquid, investors looked toward the PTTEP 2021s, 2042s and PTT Global Chemical 2022s as reference points.

After taking into account the curve extension on the comparables, PTT’s new 10- and 30-year bonds priced inside their implied curve, and in the process re-priced the entire PTT group curve. Credit spreads on the PTTEP 2042s and PTTGC 2022s were seen tightening by 8bp to 17bp throughout the bookbuilding process.

The final order book on the 10-year tranche stood at $4.75 billion from 295 accounts and the final order book on the 30-year tranche stood at $6 billion from 275 accounts. In secondary, both sets of bonds opened tighter, with the PTT 2022s quoted at Treasuries plus 158bp and the 2042s trading at Treasuries plus 155bp on Friday morning.

The transaction also establishes record low coupons for PTT across both maturities and allowed the company to extend its yield curve and lock in long-term funding at attractive rates. The coupon for the 10-year piece was 3.375%, and the notes were reoffered at 99.605 to yield 3.422%. The coupon for the 30-year piece was 4.5% and the notes reoffered at 98.702 to yield 4.58%.

The proceeds will be used for capital expenditure, working capital and refinancing of debt. While PTT has not linked its bond issue to PTTEP’s upcoming mega equity offering to fund its Cove acquisition, one observer noted that PTT, as a parent, is expected to participate in the equity deal to ensure that its stake does not get diluted. He added that PTT is “sitting on plenty of cash” but would probably like to maintain a buffer.

For the 10-year tranche, Asian investors were allocated 51%, European 25% and US 24%. Funds were allocated 65%, banks 15%, private banks 7% and insurers 13%. For the 30-year tranche, Asian investors were allocated 54%, European investors 21% and US investors 25%. Funds were allocated 60%, insurers 24%, banks and private banks 8% respectively. Barclays, Citi, Deutsche Bank, and J.P. Morgan were joint bookrunners.

Elsewhere, Bharat Petroleum also issued a $500 million debut 10-year bond late last week, which priced at Treasuries plus 290bp, at the tight end of the final 290bp to 300bp guidance. The deal attracted a $7.5 billion order book. Citi, HSBC and Royal Bank of Scotland were joint bookrunners.

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