Priced in London and New York last night (Thursday), a $2.29 billion global bond for Singapore Telecommunications has set a new Asian benchmark and stands second to the Republic of Korea's $4 billion deal as the largest on record from the region. Both deals were lead managed by Goldman Sachs and Salomon Smith Barney and bankers from each have been quick to draw parallels between the two.
Both transactions drew the kind of unstoppable momentum that the leads will now be hoping does not feed through too strongly into secondary market trading and tighten SingTel's spreads down to the kind of levels that its AA-/A1 credit rating would imply minus the telecom tag. What seems on the surface to have been an unequivocal success, has therefore, necessitated a difficult balancing act. Having put out indicative pricing in a much weaker credit environment, the company and leads have had to judge how far pricing could be tightened in without dropping investors once sentiment turned at the beginning of the week.
At the outset, the pricing levels subsequently achieved would have seemed extremely ambitious. A long pipeline of global deals in a sector that has found little favour with investors, in combination with heavy supply from Asia itself and a weakening credit market following the US Treasury's abandonment of the long bond, would have all suggested it would be prudent to put out indicative pricing above 200bp over Treasuries.
Added to this, SingTel would have also been extremely conscious of the experience of OCBC Bank, whose $2.14 billion deal of July now becomes the third largest deal on record from Asia. To clear such a large deal, OCBC and its lead manager UBS Warburg threw the distribution net as wide as possible and unable to rely on a strong Asian bid alone, had to factor in the wider pricing demands of European and US investors.
What did happen was that SingTel benefited enormously from the fact that credit spreads re-bounded strongly this week following the sudden retreat of the Taliban from Kabul and positive retails sales data from the US. This latter factor has led the market to conclude that the Federal Reserve may have been more successful than expected in pumping life back into the global economy.
As a result SingTel's three tranches of bonds have been priced at the tightest end of final price talk. Unlike many Asian bonds this year, distribution also showed a very even global balance.
A $1.35 billion 10-year dollar tranche was launched at 99.741% with a coupon of 6.375% to yield 6.41% or 185bp over Treasuries. This tranche was said to have built a book of $11 billion in demand, with a total of 157 orders from Asia, 112 from Europe and 104 from the US. Bonds were allocated such that Asia took 47%, the US 33% and Europe 20%.
A $500 million 30-year dollar tranche was priced at 99.386% with a coupon of 7.375% to yield 7.426% or 225bp over Treasuries. This book comprised $3.5 billion demand, with 69 investors from the US, 43 from Europe and 27 from Asia. Allocations were split 70% US, 20% Europe and 10% Asia.
An Eu500 million ($441 million) tranche was priced at 99.267% with a coupon of 6% to yield 6.10% or 155bp over Bunds and 125bp over mid-swaps. It attracted $2.7 billion in demand, with a total of 144 investors from Europe. In terms of allocation, bankers report that about 10% of bonds were placed in the US and in terms of pricing the deal was said to have come flat to dollar paper on a post swap basis.
Co-managers for all three tranches were Deutsche Bank, JPMorgan and Morgan Stanley. Should the company be downgraded to the BBB level, there is also a 25bp step-up in the coupon.
Alongside a more positive market tone, bankers comment that SingTel management should take most of the accolades for enabling pricing to be tightened in about 30bp. Steve Roberts, Salomon's Asian head of fixed income is the regarded as the granddaddy of DCM heads and was also one of the key figures behind Korea's groundbreaking transaction of April 1998.
He says, "SingTel management showed a level of understanding that I have rarely seen before. This was their first major international roadshow, yet they'd clearly done an awful lot of homework about the capital markets. I can't tell you how many investors told us this was the best roadshow presentation they'd seen all year. As a result, we had a strike rate of almost 100%."
Mark Bamford, Goldman's London-based syndicate head, echoes his comments. "The company was the best marketing tool we could have had," he notes. "There were three roadshow teams led by the CEO, CFO and finance team. Each one was very, very effective in selling the credit. They produced an incredibly thoughtful and insightful presentation packed with the kind of detail that always plays well with fixed income investors."
Bamford adds that this was particularly important for a debut borrower and especially since the company is not yet well known in either Europe or the US.
So did the company get its pricing right? Because of SingTel's ownership of Optus, most non-syndicate observers believe that the best comparables are Optus itself, which has a one notch lower rating and Telstra, which has a similar split rating of A+/Aa3. At the time of pricing, the former's 10 year dollar bond was said to have been bid at 175bp over Treasuries, some 10bp tighter than SingTel's dollar bond and the latter's 10 year euro at 120bp over Bunds, some 35bp tighter than SingTel's euro.
However, as one observer points out, "There's a big difference between the bid level of an outstanding deal which trades in $2 million to $3 million tickets and a new deal of $2 billion necessitating a new issue premium."
Other comparables would be incumbent European and US telcos. European telcos, weighed down by 3G concerns and ratings downgrades, tend to trade in the high 100's. For example, Baa1/A1 rated British Telecom has a 10-year bond bid at 185bp over Treasuries, while A3/A- rated Deutsche Telekom has a 10-year at 182bp bid.
By contrast, US credits with similar ratings to SingTel tend to trade much tighter. Aa3/A+ rated Bell South has a 2011 bond trading at 129bp/124bp yesterday, while SBC Communications, the world s highest rated telco, has a 2011 bond at 120bp/115bp.
In Asia itself, there is a yawning differential between highly rated non telco credits such as Hong Kong's A3/A+ rated KCRC, whose bond was bid at 91bp over Treasuries yesterday and A3/A rated Hutchison Whampoa, whose bond was bid at 204bp.
Despite the fact that SingTel's pricing appears wide, a number of fixed income research heads believe that it is fairly valued. Most viewpoints start from a belief that company has reached its rating peak and will remain stable at best over the coming few years.
"When I first heard the price talk, I thought this deal was an absolute gift for investors," says one. "But now that it's been bought down so much I think it's close to fair value, although it does look cheap on a relative value basis against credits such as Hutch.
"Personally I would rather buy other credits now," he adds. "SingTel has created so much unsatisfied demand that there will be a spillover effect into comparable Asian credits and these are the ones a clever investor should be positioning themselves in."
A number of analysts highlight the fact that SingTel's rapid diversification across Asia and the debt it has built up along the way negate much of the halo effect of triple-A rated Singapore. However, HSBC analyst Imogine Baker believes that it was this latter factor which swayed Standard & Poor's to assign a double-A rating.
She comments, "SingTel's gearing is quite high for its rating category, but there is a high level of implicit support from its government, which is not so clear with Telstra, which has similar levels of debt but is rated one notch lower by S&P."
As a result of the latest bond deal, analysts say that SingTel has a total of S$11.3 billion ($6.19 billion) debt outstanding equating to gross gearing of 82.8% and net gearing of roughly 70%. By contrast, Telstra has gross gearing of 101% and net gearing of 77%.
These debt levels stand far higher than the 30% comfort zone SingTel previously stated it would be happy with. Nearly half the amount ($2.65 billion) was inherited from Optus. It is also a far cry from the S$100 million in debt SingTel carried on its balance sheet back in 1999 and the S$5.8 billion ($3.25 billion) net cash position it reported earlier this year just before it announced its intention to purchase Optus.
Having said that its Telkomsel acquisition this November will be its last for the intermediate term, analysts believe the company will now look to reduce gearing. Proceeds from the deal, for example, will be used to take out an A$3 billion ($1.54 billion) bridge financing for the Optus acquisition.
Some also conclude that the success of the company's deal may be a harbinger of greater international involvement in Asia's credit markets.
Says Stephen Cheng, UBS Warburg's head of fixed income research, "Demand for this deal has exceeded everyone's expectations. Until now, the main driver of Asian deals has been Asian demand. The next step is to get the Europeans and US accounts more fully involved again. PCCW provided an indication that they're coming back and now that Korea has been upgraded again, we believe there may a greater consensus among international investors that Asian risk has finally bottomed out."
