Bankers believe that the combined impact of the deal's small size and lack of supply from Asia should see the transaction price at a very slim premium to the sovereign's outstanding 2009 line, currently trading at a bid/offer spread of 228bp/220bp over Treasuries. Telekom itself has an outstanding 2005 bond at 200bp/190bp over, which puts the company at a roughly 15bp premium to implied levels for a Malaysia 2005 at 185bp over.
In normal market conditions, the need for a 15bp semi-sovereign premium, 10bp to 15bp new issue premium and 10bp premium to account for the additional one year tenor, would theoretically price a Telekom 2010 at about 260bp to 270bp over Treasuries. Observers, however, comment that a final price around the 250bp mark is more likely.
At these levels, paper of comparable Asian telecommunication companies and particularly Korea Telecom (KT) start to look extremely cheap. KT's outstanding 7.625% 2007 bond, for example, is currently quoted at 260bp/245bp, against theoretical levels of 290bp and upwards for a new 10 year bond.
Malaysian spreads continue to trade inside Korea despite the fact that both command the same rating and the latter is expected to be upgraded first. However, bankers say that since the whole Asian credit spectrum has moved out following events in Argentina, investors still believe there is potential for further tightening at least over the short term. Two months ago, for example, the Malaysia 2009 was touching the psychological 200bp barrier and Telekom was bid around the 180bp level.
In a pattern common to the few international bond deals launched from Asia this year, demand for the new transaction is likely to be led by cash-rich investors from the region. Consequently, the competing attentions of a mammoth $8 billion multi-tranche bond issue by British Telecom and negative sentiment towards the telecommunications sector generally are expected to have little impact.
"This deal will be sold as a quasi-sovereign credit with more of a focus on the Malaysian growth story, rather than the group's fundamentals," says one banker. "Even if Telekom Malaysia were a company of unbelievably strong stand-alone credit standing, it wouldn't make sense to focus on this aspect in the current market environment."
So too, the small size of the deal is expected to generate additional pricing momentum, since Asian demand alone should cover the entire book. Initially the company had been expected to raise up to $400 million, but has cut the amount back slightly since it has no immediate need for funds and is said likely to return to the international bond markets next year with a much larger deal.
Analysts comment that on a stand-alone basis, the company is well-regarded and relatively under-leveraged. In its first half results, it reported debt to EBITDA levels of 1.9 times, unchanged from December. This compares with a 1.1 times level for KT, 1.59 times for SK Telecom and 0.6 times for China Mobile.
In terms of net debt to equity, the figure currently stands at 47%, down slight from December when a 56% level was reported. Total debt stands at M$8 billion ($2.1 billion), of which just under 60% is US dollar denominated, with a further 10% in Yen and the remainder in ringgit.
Over the first half of the current financial year, Telekom Malaysia managed to increase EBITDA slightly to M$2.065 billion ($543.43 million), up 3.8%. The company currently ranks as Malaysia's dominant fixed line player, with a 90% market share and total of 4.57 million fixed line subscribers as of end September, representing a penetration rate of about 20%.
Malaysia's policy of Equal Access has, to date, had little impact and analysts do not foresee much change over the medium term. Where the company's cellular operations are concerned, however, fierce competition in combination with poor national coverage (39%) has meant an unprofitable track-record, that is expected to continue until at least 2002.
By contrast, subscribers have increased massively, with the number jumping from 675,000 in June to 802,000 by end September, a year-to-date increase of 84.1% and market share of just under 20%. By year-end, the company is hoping to pass the one million mark. Most analysts agree that in order to achieve profitability, the company needs to make an acquisition.Earlier this week it announced that it was in discussions with a couple of international phone companies to forge an alliance with it cellular operations. The three are said to be Hutchison Whampoa, France Telecom and Spain's Telefonica.