Thai Oil rejuvenated the Asian debt capital markets yesterday (June 2) with an increased $350 million 10-year deal via ABN AMRO and UBS.
The Reg S transaction proved a textbook example of how to successfully execute a deal by using a small issue size and wide guidance to build momentum and leverage pricing. In what remains an unsettled market, Thai Oil also had the kind of credit profile investors have been looking for - a relatively defensive investment with a bit of a yield kicker.
The Baa1/BBB credit could be described as the classic turnaround story and one that has already proved itself to equity investors who have doubled their money since the group's $700 million IPO last October. Where the IPO attracted an order book of $16.5 billion, the debt issue managed $1.7 billion, although the book was shut one day ahead of pricing to prevent it from running away with itself.
Having gone out with indicative guidance for a $250 million deal at 125bp to 130bp over Treasuries, the leads narrowed the range to 120bp to 123bp over. Final pricing came at 99.884% on a coupon of 5.1% to yield 5.115%. This equated to 120bp over Treasuries, or 79bp over mid-swaps. Fees were also tight and are said to have come in the low teens.
Thai Oil is likely to have been particularly happy with pricing. While secondary spreads have not bounced back to their tight levels of February this year, the Treasury environment is far more conducive, with 10-year yields dropping below 3.9% yesterday.
This allowed the group to price through the levels its parent PTT achieved last August when the latter locked in 10-year money on a coupon of 5.75%. Partially state-owned PTT holds a 49.54% stake in Thai Oil.
In its ratings release Moody's cited a 10-year off-take agreement between the two as one of the key reasons why Thai Oil's rating has been lifted one notch above its stand-alone credit fundamentals. Standard & Poor's rates the group one notch below PTT.
At the time of pricing, PTT's August 2014 bond was bid at 100bp over Treasuries, or 63bp over mid-swaps. Bankers calculate that the yield curve is worth about 5bp, which means Thai Oil has come at a premium of about 11bp over its parent.
This is quite an achievement considering it is rated one notch lower and other credits have recently had to pay a new issue premium to access the market.
About 118 investors are said to have participated in the deal, with a distribution split of 37% Singapore, 20% Hong Kong, 8% other Asia, 31% Europe and 4% offshore US. By investor type, asset managers took 56%, banks 32%, insurers 10% and retail 2%.
Thai Oil has come a long way since the Asian financial crisis when its dollar-denominated balance sheet crumbled under the weight of an ambitious capex plan to build one of Asia's most sophisticated refinery operations. A $2.2 billion restructuring ensued and the last haircut was only completed in early 2004.
Since then, the company has used a huge upswing in the refining cycle to successfully de-leverage itself and analysts believe the global supply/demand balance will remain tipped in its favour. During 2004, for example, Thai Oil's refining margin averaged more than $8bbl and recently rose back up to $9 after dropping to $6 during the first quarter. At the bottom of the last cycle in 2001 by contrast, it had collapsed to just $1.
At the end of 2004, Thai Oil recorded a debt to capitalization ratio of 43.6% and EBITDA interest coverage ratio of 11 times. The company says it re-paid a further $100 million of loans in the first quarter of 2005 and is using the new bond issue to term out its debt profile and re-pay its remaining high interest loans. These are said to average a spread of 200bp over Libor
Analysts estimate that the new bond should reduce the company's annual interest expense by about Bt150 million ($4 million) per annum between 2005 and 2007.
Thai Oil has also committed to increase its refining capacity from 220,000 barrels per day to 270,000 by 2007. However, it intends to fund its capex through internal cash flow.