Despite a market that weakened during bookbuilding, the country’s largest oil refinery priced a punchy $1 billion two-part bond deal at breakneck speed that seemed to shake off the doldrums that have affected the oil and gas sector for the past few months.
Last Thursday, 11 June, Thai Oil printed a $400 million 10-year tranche at US Treasuries plus 185 basis points (at 99.859 to yield 2.516%) and a $600 million 30-year tranche at 3.75%.
Execution of the Reg S/144A deal was fast. Thai Oil went from mandate to execution within only three days.
The trade received very strong demand as soon as books opened and books had hit more than $2.5 billion within 30 minutes. By lunchtime, the banks on the deal – ANZ, Bank of America, BNP Paribas, Citigroup, Deutsche Bank and Standard Chartered were joint bookrunners and lead managers – had opted for a two-step price revision strategy to achieve the tightest possible pricing.
The first revision was announced in the Asian afternoon. Both tranches were tightened by 35bp to T+210bp and 3.95% respectively.
After books peaked at $7 billion, the leads were able to revise pricing again and final guidance was sent out at T+185bp and 3.75% which is where the two tranches priced.
One reason for the two-stage price revision was clarity. A banker on the deal explained that given the way that the market had moved over the past 10 days “we wanted to be a bit more transparent and open with investors, at an early stage as to where we think this trade is going to land.”
The other reason was the distinctly unhappy tone that began to wash over global equity markets during the day on the back of fears of a second wave of Covid-19 cases around the world. To put how much that had shaken the market into perspective, by the end of their respective days, the Stoxx Europe 600 had slipped 4.53% while the S&P 500 had fallen 5.89%.
“We thought that we were in a very strong position and we could show investors that even though things might be weakening in the equity markets, we still had a very strong order book,” the banker explained.
GET IN AND OUT
In the end, pricing on the BBB+/Baa2 (S&P/Moody’s) deal was resilient and shows how markets have settled down over the past couple of months. The last significant similar deal from the sector came from Malaysia’s Petroliam Nasional, better known as Petronas, in mid-April. But that bond issue seems to have come from another lifetime.
There the 10-year piece of the $6 billion three-tranche deal priced at 98.736 to yield 3.652% while the 30-year tranche priced at 4.55%.
Indeed, leads on this deal say that they did not use Petronas as a comp. Instead, they turned, first to Thai Oil’s own curve as well as a recent issue from PTT Exploration and Production (PTTEP).
Thai Oil last came to the US dollar markets in October last year with a $565 million 3.5% 30-year.
Thai names in the G3 markets are comparatively rare, but the other comp on the deal came from PTTEP’s $500 million seven-year bond which priced at par to yield 2.587% at the start of the month.
Extrapolating the curve on those two deals, bankers on the deal estimate that final pricing was 15-20bp inside Thai Oil’s own curve.
As has become the norm across all bond markets at the moment, demand for the paper was more significant at the longer end. What is perhaps more surprising is that the overwhelming majority of the paper was taken by Asia – more than 80% of the 10-year and almost three-quarters of the 30-year – but the banker explained that this was no accident.
“We closed the book at 0900 New York time because we just didn’t want to be in the market for too long and we had enough of very strong, very good demand outside the US.”
In the secondary market, the paper had traded wider by around 10-15bp the next day, but this was in line with the rest of the market. Earlier this week, both tranches had come in slightly and were around 8bp wider.
GOVERNMENT SUPPORT HELPS
The outlook for oil companies across Southeast Asian remains challenging. At the end of April, for example, Fitch downgraded Thai Oil’s national long-term rating and senior unsecured rating one notch to AA-(tha) with a negative outlook.
This, it said, was brought about by “lower operating cash flow than previous expectations following the economic disruptions brought on by the coronavirus pandemic”.
Bluntly, the issue facing oil companies is excess liquidity brought about by Covid-19.
“The rise in US crude oil inventories to a record high last week of 538.1 billion barrels – increasing 5.7 billion barrels again an expected 1 billion drop – underscored the task ahead for oil markets in absorbing the excess stockpile surplus,” said Howie Lee, economist at OCBC Bank in Singapore, on Monday.
But there is a sense that a corner has been turned.
Average operating rates for refineries in Asia is expected to rise from a lacklustre 72.4% of capacity in the second quarter to 75.5% and then 82.2% in the third and fourth quarters of this year, according to energy consultancy FGE.
And even if Thai Oil’s own share price is nowhere near the Bt72 ($2.29) where it traded at the start of the year, it has been climbing steadily and is comfortably off the Bt27 low it had reached at the end of March, according to Bloomberg.
“The extent of the hit to the 2020 earnings of the South and Southeast Asia energy majors will depend on their integration, complexity, and diversity of products mix,” warned S&P Global Ratings credit analyst Shawn Park in a note in May.
But with its group support and indirect government support (via PTT of which it is a subsidiary) it is hard to think of an oil company better placed than Thai Oil to withstand current volatility.