The Kingdom of Thailand returned to the international bond markets for the first time in a year yesterday (Thursday) with its largest deal to date. Yet to describe the $1 billion transaction as a bond would be a complete misnomer, since it closely resembles a Japanese club loan and is as far removed from benchmark status as a sovereign bond could possibly be.
Backed by a Baa1/BBB/BBB rating, the three-year FRN has a one-year call option and was priced at 99.94% to yield 13.5bp over six-month Libor.
Pricing was so ridiculous that lead manager Barclays Capital could only muster $860 million in demand, leaving $140 million sitting on its own books. To put pricing in perspective, Thailand's outstanding and highly illiquid April 2007 bond is currently trading at 29bp over Libor.
However, specialists say the lead is comfortable with the residual position and believes it can deal with at least a portion of it fairly quickly, since some prospective investors were unable to get lines in place as the deal was accelerated to avoid further market volatility.
Barclays was mandated on the deal nearly one month ago after a fierce bidding contest, which is said to have led two competing banks to bid for it at single digit spreads over Libor. The British bank won the transaction and agreed to hard underwrite it at 11.5bp over Libor. With the addition of 7bp in fees, this gave it an all-in of 13.84bp.
At the time the deal was mandated, market participants believed it would just about prove possible to execute even though it held no relative value to any existing triple-B rated curve.
Most bankers calculated that a combination of the sovereign's rarity value and domestic demand would push it through. Many, however, were wary of incurring market risk and it is because of this that both Deutsche and UBS walked away at the final hurdle.
Indeed, since then Thailand has been plagued with unforeseen political instability and emerging market spreads have crumbled. Given that Barclays was unable to alter the pricing, most of its rivals concluded the deal would turn out to be a complete disaster.
But the Japanese banking community appears to have saved the day placing orders for just over $600 million, or 70% of the total amount syndicated. Specialists say 17 investors participated overall, with a split that saw 80% placed offshore and 20% onshore. None of the international placement went to offshore units of Thai banks.
Japanese city bank UFJ was credited as a co-lead manager and non-syndicate bankers say it took a $400 million ticket. Its desire to participate was driven by a pending application for a Thai banking license and desire to book assets.
But as one banker points out, "Because it doesn't have a license yet, UFJ had to fund the ticket through a separate account at a cost of Libor plus an eighth, in the process incurring negative carry."
Co-managers were Daiwa SMBC and Mizhuo Bank, which also took big tickets. Of the remaining 10% placed internationally, bonds went to Hong Kong, Singapore and Malaysia.
Virtually no bonds were placed in Europe, even though the sovereign spent the early part of the week conducting roadshows in London. However, specialists say this was no great surprise, commenting that the trip was structured to allow Thailand to market its credit story among an investor base it has not visited before.
The remaining 20% of the deal was placed domestically and at roughly $170 million this was less than expected. During their original pitches, most banks were estimating local demand of about $300 million.
Non-syndicate bankers say the Ministry of Finance itself had to twist the arms of locals banks to participate in the deal. As one explains, "The call option makes the bond very unappealing to local banks because it's difficult to swap the deal back to Baht and it removes any arbitrage between sovereign spreads in the domestic and international market."
Rival bankers have argued that the only thing Barclays stood to gain was a dent in its reputation. It certainly appears to have made next to no money from the deal, but it has broadened its franchise and it will shoot right up the league tables.
Some bankers maintain that transactions with maturities of less than 18-months are not league table eligible. However, analytics provider Dealogic, which compiles league tables used by FinanceAsia, says the deal will be included, because it has a call option rather than a step-up structure, which would not be eligible.
Proceeds from the bond are being used to pay down expensive World Bank and IMF loans undertaken at the time of the financial crisis. Yet the country's many critics wonder why the sovereign continues to issue "phantom" bond deals, rather than set a true institutional benchmark.
"Either fund in the domestic market where it is cheaper, or accept the price the country needs to pay for establishing a proper international benchmark," says one banker. "This deal achieves absolutely nothing. It doesn't reflect well on Thailand and effectively it's just a syndicated loan."