Singapore Technologies Engineering (STE) sold $500 million of 10-year notes late last night (Hong Kong time), making it the first triple-A-rated borrower from non-Japan Asia to tap the international bond markets since 2006.
On Monday (July 7) STE said it planned to sell $1.2 billion worth of medium-term notes (MTN) in several currencies to finance future investments. But the conglomerate, majority-owned by Singapore sovereign wealth fund Temasek, plans to stagger its capital raising over time and had no need to use the full facility at this time.
Based in the Lion City, STE is an integrated defence and engineering group operating in 24 countries.
The issuing entity, ST Engineering Financial 1 Ltd, is a wholly owned special purpose funding subsidiary of STE. The parent company unconditionally and irrevocably guarantees the programme and the proceeds will be lent to STE, which will use them to fund new capital spending and future acquisitions, for general corporate purposes and for the refinancing of existing borrowings.
The notes pay a semi-annual coupon of 4.8% and were re-offered at 99.404 to yield 4.876% to a maturity date of July 16, 2019. That translated into a spread of 150bp over the yield of the 10-year US Treasury benchmark bond, which was tighter than the initial spread guidance of 160bp-170bp.
The initial size of the order book was $2.85 billion, but that fell to $2.5 billion when final pricing was announced. A weak US Treasury market yesterday didn't help. However, the spread of 150bp looked in line with comparables: Temasek's own $1.5 billion 2015 bond -- albeit a tad illiquid having been launched back in 2005 -- was bid at 150bp over US Treasuries, and much larger, but lower rated, US and European companies with similar business activities have been issuing debt at the same level.
The Regulation-S issue excludes onshore US investors, and around 80% of the STE deal was placed in Hong Kong and Singapore, following roadshows in both trade hubs organised by joint bookrunners Deutsche Bank and Morgan Stanley. The balance was sold to UK and European accounts after a truncated schedule of one-on-one investor presentations. The documentation process necessary to achieve Rule 144a status can be long and tortuous, and clearly it seems that the lead managers thought it unnecessary to bring in US investors.
According to sources familiar with the transaction, about 75 accounts were allocated bonds, and most of the issue was placed with fund managers, insurance companies and high quality commercial banks. Up to two-thirds were cash buyers, with the rest hedging out of Treasuries.
The deal is rated Aaa by Moody's and the equivalent AAA by Standard & Poor's. The last Aaa-rated corporate in non-Japan Asia to issue offshore was PSA Corporation, Singapore's port operator, in 2006.
Moody's assigned the Aaa senior unsecured rating to the MTN programme on July 7 -- the same (stable) rating as for STE. STE enjoys strong support from Temasek, which has a 50.29% stake. STE had its rating reaffirmed at Aaa with a stable outlook in August 2005.
"STE's underlying credit strengths reflect its strategic role as a major supplier of defence products, support services and electronics solutions/services to the Singapore government. It also reflects its enlarged scale and improved product and geographic diversity, global leadership in the niche third-party maintenance repair and overhaul market, solid backlog of orders supporting future revenue, and strong credit metrics," said Kathleen Lee, a Moody's senior analyst.
Moody's expects that the Singapore government's increasing defence budget spending and the company's strong order book should continue to enable STE to show a stable operating performance over the medium term, even in the face of a challenging macro environment. But, "the company's balance sheet is likely to switch from a historically net cash position to a net debt position over the next two years, if it continues with its current high dividend payout policy," warned the ratings agency.
Support from Temasek is also critical. Moody's said that STE's rating "would be downgraded if evidence emerged of a weakening in support from Temasek, such as reduction in ownership, or increasing debt leverage without either adjusting dividend policy or a capital injection from Temasek". There is no change of ownership covenant attached to the MTN programme.
But S&P said that its AAA rating on STE reflected its opinion that there is an "extremely high likelihood that the government of Singapore would provide timely and sufficient extraordinary support to STE in the event of financial distress".
STE was formed as a listed holding company in Singapore in December 1997 through the merger of four companies: ST Aerospace, ST Electronics, ST Automotive and ST Marine. At the end of December 2008, it had total assets of S$5.99 billion ($4.1 billion).