A $300 million 10 year offering for the Baa2/BBB-rated credit was priced last night in New York (Thursday) and upsized slightly from $250 million to take into account a $500 million order book.
Led by joint leads Deutsche Bank and Merrill Lynch, the offering came at 99.068 with a semi-annual coupon of 8% to yield 8.138%, or 262.5bp over Treasuries. Sold in euro 144a format with fees totalling 40bp, the deal also numbered four co-managers - ABN AMRO, Chase, Nomura and Salomon Smith Barney.
Bankers described the deal as well executed in trying market conditions. Events in Argentina and Turkey continue to overhang the emerging markets sector, while falling equity markets, prolonged uncertainty over the US Presidential election and general end of year fatigue have conspired to create a weak overall tone to the credit markets.
Above all else, however, the looming prospect of a $6 billion to $8 billion eurobond by British Telecom (BT) early next week has pushed all corporate spreads wider and monopolised attention. It has also provided a pricing benchmark for Telekom Malaysia, which despite being rated three notches lower, has been priced at indicative levels for BT's 10 year tranche.
In addition, BT's transaction incorporates numerous covenants and most importantly, step-up coupons in the event of ratings downgrades to the triple B level. At 25bp per notch downgrade, this potentially offers investors an extra 75bp in yield.
"Everyone has BT on the brain, but personally I would buy Telekom Malaysia any day because it carries less execution risk over the longer term," says one observer. "BT has the financial credentials of a BBB credit, but the rating agencies appear to be giving the management extra leeway for their de-leveraging strategy. However, indicative pricing levels suggest that the market is not buying this argument and it's not really very surprising when you consider that there's been no evidence of a successful de-leveraging strategy to date."
BT's main impact, however, has been to divert attention from Telekom, which ended up with a slightly larger Asian order book than originally intended. Bankers report a geographical distribution split of 67% Asia, 21% Europe and 12% US.
About 60 tickets were counted, most of which fall in the $5 million to $15 million range. Asian demand is also said to have been fairly evenly balanced, with bank buyers predominating in Japan and Korea and institutional accounts in Singapore and Hong Kong. There are said to have been a couple of asset swap orders and a few switches, but mostly cash.
"Investors are still sitting on a lot of cash, but it's the end of the year and they are being quite cautious where they put it," one banker reflects.
At 262.5bp, Telekom has come at a roughly 24.5bp premium to the Federation of Malaysia's 2009 bond, which was trading at 238bp/235bp at the time of pricing. Most DCM professionals were either expecting a premium around this level, or slightly wider after the sovereign softened 8bp to 10bp in the two days prior to pricing.
On Tuesday, the two leads went out with preliminary price guidance at the 265bp mark. This was followed on Wednesday when the book opened in Asia, by a narrowed range of 260bp to 262.5bp. At the close of the Asian book later that day, the 09 was trading at 232bp/227bp, but had widened out to 235bp/230bp by the time New York closed. Yesterday, (Thursday), it gapped out a further 3bp.
Telekom itself has a 2005 issue outstanding, trading around the 213bp mark at pricing. The telecommunications credit has averaged a 15bp premium to theoretical levels for a Malaysia 2005 in recent weeks. When this is considered alongside about 8bp to 10bp on the credit curve for an extra year's maturity to 2010, plus the standard requirement for a 10bp to 15bp new issue premium, final pricing appears relatively aggressive.
Small in size and benefitting from the region's lack of supply, the deal has been deemed a success by observers. As one banker concludes, "The issuer is very happy with the execution of this deal. It came tight relative to the sovereign and managed to do so on a day when market conditions have been far from easy."