Joint lead managers Goldman Sachs and JPMorgan withdrew a $250 million to $300 million high yield deal for Malaysia's Titan Petrochemicals yesterday (Tuesday) after failing to find sufficient investor support around the 8.5% indicative pricing level.
News that the seven non call four deal was being postponed did not come as much of a surprise given it had failed to price on schedule towards the end of last week. However market participants believe its disappointing performance highlights a number of questions about the nature of the Asian high yield market and indeed, whether there even is one.
While many Asian credits are rated non-investment grade, few qualify as true high yield deals. Bank sub debt is lowly rated because of its structural subordination to senior debt. On the corporate side, most deals are typically capped by low sovereign ceilings (Philippines and Indonesia), or can rely on the halo effect of a major shareholder (Singapore inc for the Indonesian cellular operators and indirectly Hyundai Motor for Korea's Sun Sage).
Classical high yield deals, where the corporate is a low double B or high single B rated entity operating in an investment grade country, are few and far between in Asia. In recent years there have only been four deals and pricing has almost always been far cheaper than the market was originally expecting.
In 2002, UBS led transactions for AES China - a B/B3 rated $175 million seven-year deal with a 9.25% coupon and for CAB Holdings - a B rated $115 million three-year deal with a 8.25% coupon. Earlier this year, Citigroup also completed a $150 million deal for B/B3 rated semiconductor packaging and testing company, ASAT Holdings, based in Hong Kong. This B/B3 rated deal was priced with a 9.25% coupon.
But the most relevant transaction for Titan was a $200 million deal by Korean auto parts manufacturer Sun Sage Mando completed just over a week ago. Sun Sage is rated B+/Ba2, compared to Titan's BB-/Ba3 rating and priced a seven-year deal with a coupon and yield of 8.25%. This is 25bp tighter than Titan's indicative level and in many ways the deal should have been less attractive for investors because of its structural subordination within the Mando group.
However, Sun Sage's offering enticed a healthy enough order book primarily because the credit was viewed as a leveraged play on Hyundai Motor, its major client. As a result, the deal received a strong bid from Asia as well as the US and final distribution saw 52% placed into Asia, 28% to Europe and 19% to the US.
But some argue that Sun Sage is the exception to the norm since there are very few Asian high yield investors to backstop pricing in their home market and bring balance to a global order book.
As one high yield specialist points out, "Bankers always go wrong when they benchmark pricing of high yield deals against other Asian credits with similar ratings. They are different types of credits and appeal to different investor bases.
"A corporate credit from the Philippines or Indonesia attracts a strong local bid and is often constrained by its sovereign ceiling," he adds. "True high yield deals normally get placed in the US where investors are always far more picky and hold all the pricing leverage."
In Titan's case, US investors had a very clear pricing benchmark, a July 2011 bond by Westlake Chemical Corp. US-based Westlake and Titan are both owned by Chao Group International of Taiwan.
Westlake has a one notch lower rating than Titan from Standard & Poor's, B+ and the same rating from Moody's, Ba3. Its 8.75% bond was trading at a yield of 7.5% yesterday.
A 100bp differential between the two bonds should have been enough of an enticement to US investors, but it wasn't.
Again geography is cited as the reason why. One specialist explains, "Sitting here in Asia, a 100bp pick-up between a US and Malaysian high yield company seems very attractive. But were you to ask 10 US investors to pinpoint Malaysia on a map, five of them probably wouldn't have a clue where it is.
"When you go to see these investors," He continues, "you're only dealing with the sector analyst and high yield analyst both of whom are typically very focused on the US. The sovereign analyst would understand the nuances of Malaysia well, but unfortunately they'd have no interest in the deal because it's out of their ratings category."
Others further comment that US investors were not interested in buying Titan's deal when there were plenty of similarly rated chemical companies available in the US, which they understood far better.
In Titan's case, some specialists say there were also issues with the volatility of the petrochemicals sector and the company's debt restructuring.
In particular, Titan entered a debt restructuring in 2001 allowing it to defer payments on a 10-year loan taken out in August 1997. Under the terms of the deal, agreed by creditors Bank of Nova Scotia, JPMorgan, Maybank and RHB Bank, Titan could gradually re-pay principal from 2003 to 2008. This year $50 million falls due, followed by four annual payments of $80 million.
But as one specialist argues, "Titan management are extremely experienced and have been at the company for a long time. They were very unlucky during the financial crisis and got hit by the perfect storm. They were just coming to the peak of their capex cycle as oil prices shot up and demand for plastic dropped. It led them to breach one of their covenants."
Debt to 2003 EBITDA currently stands at six times and debt to capitalization at 76%. The Johor-based company hopes to bring the latter down to 42% by the end of 2008.
It may effect the reduction even faster if it completes its IPO on schedule later this year. Lead managers are once again Goldman and JPM alongside CIMB.
"If the petrochemicals cycle remains strong then this could turn out to be a very interesting de-leveraging play," the specialist adds. "But it is a big if. The cycle turned during the middle of last year and some people think it could run for a further four to five years. At the moment supply is quite limited in Asia, but a significant amount of new capacity is scheduled to come on stream in about three years and it would be bad news if this co-incided with a downturn."
Titan's failure leaves Singapore-based Continental Chemical in something of a quandary. Earlier this year the company began marketing a $100 million to $150 million bond issue via UBS. However, the B rated deal was withdrawn after investors demanded a yield of up to 10%.
Since then, the deal has been restructured and received new ratings from the agencies this week in anticipation of a second launch date. Standard & Poor's has now assigned a B+ rating, while Moody's rates the company B1.
The new deal will also have less structural subordination. Previously investors baulked at a transaction by a holding company when the rest of the debt sat at the operating company level. They also didn't like proceeds being on-lent to a Chinese subsidiary where creditor protection would be difficult to enforce.
Analysts say Continental is a smaller and weaker credit than Titan and also operates in the downstream part of the sector, whereas Titan is a mid-stream operator. However, they add that Continental has developed a successful track-record in turning distressed assets around. Like Titan, it also hopes to complete an IPO in 2004, using proceeds to re-pay debt.