Temasek has opened this week with the issue of its inaugural sterling bond, a £700 million ($1.07 billion) Aaa/AAA-rated issue. This is the first time the Singaporean investment company has priced a bond denominated in pounds and the first time an Asian corporate has issued in sterling since ICICI Bank priced a £350 million bond in 2007. And being such a rare event, investors were keen to buy into the transaction.
After going on the road early last week, Temasek announced the dual-tranche deal in the London morning on Monday and by the afternoon of the same day it priced £200 million of 12-year bonds and £500 million of 30-year bonds.
The bonds priced with 4.625% and 5.125% coupons respectively. The shorter tranche, which is set to mature on July 26, 2022, was reoffered at 99.665, while the longer tranche, with a maturity date of July 26, 2040, was reoffered at 99.55.
The Reg-S registered bonds were issued through Temasek's $10 billion global medium-term note programme.
The appeal for Temasek of doing a 12-year and 30-year sterling deal was to maximise demand and distribution. "If you look at the way the sterling market functions, there are a number of investors who follow indices that are 15 years and longer or 15 years and shorter," shared one source.
Temasek has built a reputation as a long-term fundamental investor. Therefore, doing this deal was very much a strategic business decision in terms of accessing long-dated markets. Last year it issued a $500 million 30-year bond and in February this year it priced a $1 billion dual-tranche 10-year issue.
Long-dated bonds are found primarily in the US dollar and sterling markets. The Singapore dollar market is long-dated to some degree, which Temasek has taken advantage of. Most recently it sold S$1 billion ($725 million) of 10-year bonds, also in February.
It has a well thought-out plan and "has used different currency and tenor mixes that make sense to its assets and overall portfolio both from a risk management and funding perspective," a banker close to the deal said with regard to Temasek's long-term funding strategy.
Prior to the announcement there had been an initial whisper that the 2022s would price between 97bp and 100bp over the UK yield curve. In the end, the deal priced below that range at 95bp.
The 2040s saw a similar pricing development with the joint lead managers -- Deutsche Bank, HSBC, Royal Bank of Scotland and UBS -- indicating that the yield spread would be within the range of 93bp to 95bp. The bonds finally came to market at 90bp.
The spreads on both tranches tightened by about 5bp to 8bp during Asian trading yesterday and, by late afternoon, the 2022s were trading at 90bp over the UK yield curve, while the 2040s were quoted at 80bp. The tightening was mainly driven by accounts that were looking to top up their initial allocation.
Given that there were no liquid Asia-based benchmarks, the lead managers looked to other investment grade non-UK corporates to gauge the appropriate pricing. Those comparables were Procter and Gamble, Walmart, Johnson & Johnson, Electricite de France, Statoil and Pfizer, which have all recently issued long-dated bonds in the sterling market.
The sterling market is an insular market and, as one banker noted, the buy-and-hold nature of it is such that not a lot of trading is seen in these bonds.
"There's not a lot of liquidity in the bonds right now," said another source. "Investors tend to stick them in a drawer and never see them again."
In the primary market, the 12-year tranche was about two times oversubscribed and the 30-year tranche was two-and-a-half times oversubscribed. Lead managers observed that some of the buyers were global players with large sterling portfolios, while others were sterling-focused accounts.
The sterling market is populated by a club of 20 to 30 insurance companies and pension funds that really drive that market and tend to have a natural appetite for long-dated bonds. This club, as well as a large number of well-known US investors with offshore portfolios seemed to be the main drivers during the bookbuilding process.
The regional distribution of the 12-year bonds saw UK-based investors receive 65.9%, German investors 20.1%, Swiss investors 4.6%, offshore US investors 3.9%, Singapore-based accounts 2.5%, Benelux investors 2.3% and the rest of the world 0.7%.
In terms of allocation across investor type, fund managers made up 45.5% of the allocation, insurance houses took 39.7%, private banks 6%, banks 3.3% and other investors 5.5%.
The allocation of the 2040 tranche was quite similar. Like the 2022s, the majority of the longer tranche, or 82.9%, was sold into the UK, 15% went to Germany, 0.9% to offshore US investors, 0.5% to Switzerland, 0.3% to Singapore and 0.4% to Benelux.
As mentioned, buy-and-hold-type accounts dominated with fund managers allocated 60% of the bonds, insurance houses 31.2%, pension funds 5.8%, private banks 1.0% and other investors 2%.
Bank of East Asia
The Temasek bond came on the back of a busy few days last week in terms of new issuance, which ended with Bank of East Asia returning to the market last Friday with a $150 million tap of its existing $450 million 6.125% fixed-rate 2020 bonds that were issued earlier this month.
The tap brought the total deal size to $600 million and the newly issued notes will carry the same July 16, 2020 maturity date. They were re-offered at 100.102 to yield 6.111%.
Initial guidance went out on Friday at Treasuries plus 315bp and the bonds eventually priced at 313bp over. When the deal was first sold into the market on July 9, it was priced to yield 6.256%, which equalled a spread of 320bp over 10-year US Treasuries.
As this was a reverse inquiry driven by Asian investors, the tap was only open to Asian accounts and the order books closed on Friday evening (Hong Kong time). By then, however, joint bookrunners Citi and J.P. Morgan had secured $800 million of demand from 84 accounts.
The final allocation saw Hong Kong investors receive 60% of the bonds, while the remaining 40% went to the rest of Asia. Private banks took almost half of the bond, or 48%, banks bought 23%, fund managers 22% and the remaining 7% was allocated to insurance houses, corporate investors and other types of investors.
Neither the BEA bonds nor the wider investment-grade banking sector have deviated much from where they traded at the end of last week. Early yesterday the BEA 2015s were still trading at a spread of around 309bp to 310bp. By midday they had tightened to 305bp.
Despite the markets remaining slightly volatile, deals are still getting done and the pipeline remains laden with new issues looking to come to market. In the immediate future, E-land Fashion, Neptune Oriental, Alliance Global (a Philippine high-yield deal) and China Resources Power are all expected to price.