Lead managers JPMorgan and CIMB priced an increased $350 million convertible for the Malaysian electricity utility at London's close yesterday (Tuesday) following a one-day bookbuild. Lehman Brothers had also originally been mandated as joint bookrunner on the five-year deal, but was removed at the eleventh hour after the company decided to proceed with just one international bank. Co-managers were Dresdner and HSBC.
Terms came at the wide end of the indicative range, but this was said to have enabled Tenaga to maximise proceeds, which are being used to re-finance debt and lengthen the company's maturity profile. With a coupon of 2.625%, the deal was priced on a conversion premium of 16% over a closing price of M$8.75 and has par redemption. This compares to an indicative coupon of 2.125% to 2.625%, conversion premium of 15% to 20% and issue size of $300 million.
The deal also has a call option in year three with a relatively low 115% hurdle and a put option in year three at 102.568% to yield 3.44%. This compares to a 3% to 3.5% pre-marketed range.
There is also a $50 million greenshoe, which if exercised, means the offering will top Telekom Malaysia's $360 million deal of September 1994 as the largest ever from the country. For JPMorgan, completion also underlines the bank's increasingly strong franchise in Malaysia, where, for example, it led an IPO for PLUS earlier this year.
Underlying assumptions comprise a bond floor of 96.5% and implied volatility of 16.5%, to give a theoretical value of 102.6% using a volatility assumption of 22%. Historic (100 day) vol stands at 28%. These assumptions are based on credit spread of 210bp over Libor, dividend yield of 0.8% and stock borrow cost of 5%.
There was some disagreement among market participants about how difficult the deal had been to execute. Those closest to it say books were covered with an hour-and-a-half of marketing and closed just over two times oversubscribed. Others claim the transaction was not particularly easy as outright accounts were unimpressed by the equity story. The stock is down 18.22% year-to-date compared to a roughly 5.7% decline in the KLCI.
They consequently argue that there had to be a larger hedge fund component, which pushed credit default swap (CDS) spreads out to 260bp as funds rushed to seek credit protection.
This is dismissed by the lead, however. Officials say there was asset swap demand for about a third of the deal. They also add that CDS spreads moved from about 180bp to 220bp ahead rather than during the deal, as the threat of new supply became a reality.
Tenaga also has a June 2007 bond outstanding in the straight debt markets and this was bid at about 180bp over Treasuries in Asia yesterday, representing a Libor equivalent spread of about 150bp. Like a number of Malaysian credits, it had widened 5bp as news of the deal broke.
Bankers report a total of 50 accounts in the book, with a geographical split which saw 75% placed into Europe, 20% into Asia and 5% into the US. Funds were said to be very credit focused and liked Tenaga because its utility status met a need for 'safe' credits.
One banker also adds that positive sovereign ratings momentum aided the deal since the company's investor base is moving away from an emerging markets to high grade focus. However, as a number of analysts have recently pointed out, Tenaga has not precisely mirrored the sovereign's upwards rating trajectory. Indeed, while Malaysia is now rated Baa1/BBB+, Tenaga has a Baa3/BBB rating.
In a recent ratings report, UBS Warburg highighted what it termed a de-linking of the two ratings. "We were not surprised that when S&P upgraded Malaysia's sovereign rating from BBB to BBB+, Tenaga's BBB rating did not follow," it said. "We believe the impact of a leveraged balance sheet, declining operating margins and the need to resolve issues over its gas shortages, will also prevent Moody's from making any positive revisions to its Baa3 credit."
Over the short-term, the new convertible will increase the company's leverage, with total debt standing at M$28.1 billion ($7.39 billion) at the end of the third quarter. As a result, debt to EBITDA is likely to creep up from 6.65 times to a fraction under seven times, a high level for Tenaga's current rating category. But the net net effect on its balance sheet should be positive once the outstanding of a $310 million convertible expires next year, since the average maturity will be extended.