PTT mandates international bond debut

O&G giant set to provide Thailand''s first proper benchmark since the financial crisis.

PTT Public Company Ltd, Thailand's integrated petroleum company, is hoping to make its international bond market debut in May with a $500 million fixed rate issue. Citigroup, Deutsche Bank and JPMorgan have been mandated to lead the deal, which has no fixed tenor and is as yet unrated.

The transaction will mark the first true benchmark from Thailand since the financial crisis and as such should be propelled by its great rarity value. International investors have been almost completely starved of paper for the last seven years, with the exception of esoteric deals such as EGAT's World Bank guaranteed bond of 1998 and the Kingdom's "phantom" international bond deal of 2003 and its similar forthcoming fundraising exercise via Barclays.

PTT seems likely to secure the Baa1/BBB sovereign rating in line with its 63% owned subsidiary PTTE&P, which is already rated at the same level. Until its IPO in November 2001, most of the group's debt was guaranteed by the government.

This is no longer the case and indeed one of the major reasons for the IPO was to try and cut government apron strings. The Ministry of Finance currently owns 69% of the group and the remainder is in freefloat.

At the time of its IPO, PTT pledged to reduce its $2.85 billion debt load. It said it hoped to lower gearing from 123% in 2001 to 100% by 2004, with its most optimistic supporters forecasting a figure of 50%.

At the end of 2003, it had beaten even the most aggressive of assumptions, with net debt to equity falling to 48% or $1.59 billion from 99.7% at the end of 2002.

Over the coming five years, the group has a $7 billion capex plan to build a third gas pipeline, construct a gas separation plant and expand its downstream petrochemical operations. However, it has also said the programme can be funded entirely through cash flow.

In turn its strong cash flow generating abilities mean debt coverage ratios are high. At the end of 2003, for example, it ran a net interest coverage ratio of 6.4 times.

Its plans to access the bond markets are being driven by a desire to re-finance up to Bt50 billion ($1.3 billion) of its debt while interest rates remain low. Alongside the international bond, it is also laying plans to raise up to Bt20 billion from the domestic bond market.

Its last domestic bond issue in November 2003 comprised a Bt13 billion seven-year issue and Bt11.2 billion 10-year issue with a step up in year five. Both issues were priced at par with coupons of 4.5%, with the 10-year stepping up to 5.75%.

The most relevant comparables in the international market are likely to be A-/A3 rated Petronas from Malaysia, BBB+/A2 rated CNOOC from China and A3/A- Kogas.

The former has a 7.75% August 2015 bond outstanding that is currently bid at 5.48% to yield about 125bp over Treasuries, or 82bp over Libor. CNOOC has a 4.125% May 2013 bond outstanding, bid at 4.99% to yield 76bp over Treasuries or 42bp over Libor. Kogas also has a 4.75% November 2010 bond, which is trading in the low 60bp area over Libor.

PTTE&P itself has a highly illiquid October 2006 bond trading at 110.77% bid to yield 3.04% or 115bp over Treasuries and 59bp over Libor.

Its parent PTT has three main areas of operation of which gas is dominant - the company has a monopoly over gas transmission and its network supplies up to 70% of power generated in the country. Gas contributed Bt6.5 billion of EBIT in 2003, while E&P contributed Bt4.28 billion via the company's stake in PTTE&P and petrochemicals contributed Bt1.4 billion. Later this year, it hopes to spin off refiner Thai Oil.