Tenaga turns market with success

Malaysian electricity utility completes successful cash tender and global bond offering.

Tenaga Nasional Berhad looks as if it may have provided the Asian debt markets with a much needed lift following the successful completion of a tender and bond offering yesterday (April 27). Under the lead of Barclays Capital, CIMB and Credit Suisse First Boston, the group received $394 million from its tender offering and issued a $350 million bond to fund the buyback.

It achieved a much higher tender ratio and better pricing than it did in March 2001 when it last came to the international bond markets with a transaction that exactly mirrors the new deal in all structural details. This is all the more impressive in the context of dreadful market conditions, which have yielded just one bond offering since mid-March - a sovereign bond from Indonesia in mid-April that unraveled the minute after it priced.

This time round Tenaga was able to buy back $65.9 million its $107.55 million 7.2% bonds due April 2007 and $328.1 million of its $500 million 7.625% bonds also due in April 2007. This equates to a tender ratio of 61% for the 7.2% bonds and 66% for the 7.625% bonds.

Management must have been particularly pleased with the tender ratio for the 7.2% bonds since these had previously been included in the March 2001 tender and they would have not have expected to get that much back a second time round. In 2001, Tenaga achieved a tender ratio of 59% for its 7.2% bonds and 51% for its June 2004 bonds.

Tenaga's latest tender was announced on April 7. Similar to 2001, the intention has been to term out the company's maturity profile and improve its funding costs. Investors were given 20 days to tender their bonds, although they were incentivized to do so within the first 10 days so the leads would know how to size the new global bond offering.

The tender was priced at a fixed spread of 15bp over Treasuries. At the time the tender was launched, the two bonds were being bid at about 65bp over Treasuries, which means investors were offered a pick-up of roughly 50bp to secondary market levels.

In March 2001, Tenaga offered a pick-up of 50bp for the tender of its 2004 bonds and 85bp for the tender of its 7.2% bonds.

Specialists say about one third of investors who tendered their bonds opted to take part in the new global bond offering. A minimum offer size of $250 million was announced last Friday and indicative guidance of 75bp over swaps on Tuesday.

Having built up an order book of $1.1 billion, the 10-year deal was upsized on pricing to $350 million, which fitted the size of the tender. Pricing came at 99.050% on a coupon of 5.25% to yield 5.374%. This equates to 114bp over Treasuries, or 70bp over mid-swaps.

About 100 investors participated in the book, which had a split of 55% Asia, 35%US and 10% Europe.

What is most remarkable is how Tenaga has been able to close the pricing differential between the sovereign and Petronas since March 2001 despite the fact that the rating differential has widened significantly in the interim period. In the autumn of 2000, Tenaga dropped below the sovereign for the first time and at the time of its last deal was rated Baa3/BBB versus a Baa2/BBB rating for the sovereign and Petronas.

Now Petronas is rated three notches tighter by Moody's than Tenaga and the sovereign two notches tighter. Tenaga currently has a Baa2/BBB rating, while the sovereign is rated A3/A- and Petronas A2/A-.

Tenaga's new deal has priced at a premium of roughly 24bp over an August 2015 bond by Petronas, which was bid yesterday at 90bp over Treasuries or 46bp over Libor. In 2001, it priced at a 25bp to 30bp premium to Petronas.

In the secondary market, there is a wider differential between the two particularly at the long end of the curve. There is, for example, currently a 33bp differential between Tenaga's November 2025 bond bid at 168bp over Treasuries and an October 2026 bond by Petronas bid at 135bp.

A week ago, that differential was more like 19bp, but Tenaga has widened since then while Petronas has tightened.

There is also a similar 28bp differential between Tenaga's April 2011 bond, which is bid at 58bp over Libor and the sovereign's July 2011 bond bid around 30bp over. In 2001, Tenaga was trading at a 70bp premium to the sovereign.

Bankers believe the deal went well for two main reasons. Firstly they believe the overall market has reached an inflexion point with investors ready to re-engage provide they are presented with a defensive low beta credit like Tenaga.

"This is a rare name and there's been a noticeable flight to quality over the past few weeks," notes one banker. "Let's hope it gives other issuers confidence to come back too."

Secondly they believe Tenaga itself has reached an inflexion point in its credit history. The company is now run by new management who have prioritized debt reduction.

The company announced its 1H05 results last week, with overall debt dropping 4% to Rmb31.2 billion ($8.2 billion) from Rmb32.5 billion the same period the previous year. Debt to EBITDA came in at 5.3 times, of which 50% is foreign currency denominated.

Tenaga's heavy leverage is frequently cited by the agencies as the main reason why its rating has lagged the upgrades of other government proxies. The new management say they hope to cut foreign currency borrowings to 25% over the medium term and bring down overall leverage.

This is expected to be part funded by equity and partly by a tariff increase, although previous management said the same thing back in 2001. Tenaga has not been able to implement any tariff increases since 1997.

A lot of its problems hark back to the Asian financial crisis. Pre crisis Tenaga was active in the dollar denominated market at a time when the currency M$2.4 to the dollar. Post crisis, the Malaysian ringgit has been pegged to the dollar at M$3.8.

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