YTL Power plans CB

The Independent Power Producer (IPP) is planning to launch the first convertible from Malaysia in nearly four years.
Credit Suisse First Boston and Deutsche Bank have the books for a $100 million to $150 million bought deal that is expected to launch within the next month to six weeks. Should the offering proceed, it will mark the first equity-linked issue from the Federation since a $200 million exchangeable by Rashid Hussain in June 1997.

Pre-financial crisis, Malaysian issues traditionally ranked as the most highly prized within the Asian CB universe and today, there are still less then half a dozen issues outstanding. Of this number, only one deal, issued by Telekom Malaysia in 1994 and due October 2004, is considered in any way liquid and trades as straight debt on a yield-to-maturity of 6.6%

Specialists believe that although the Malaysian equity market has fallen off the screens of most international equity investors, a well priced and adequately sized deal with a fixed income tilt is likely to be well received. They also report that YTL Power's exceptionally strong balance sheet, combined with the company's small free float and low stock price, should prove a winning combination.

The main question, however, is why a company with a cash pile currently standing at six times annual EBITDA earnings is contemplating a convertible in the first place? Indeed, the company initiated a share buy-back scheme in September last year to make better use of M$3.5 billion in cash that it had seemed unable to sink into new domestic projects and was dragging ROE (Return on Equity) down to 9.89% as of FY June 2000. EBITDA earnings stood at M$681 million.

As one Kuala Lumpur-based analyst puts it: "YTL Power was Malaysia's first IPP and after listing in 1997, tended to trade at a 10% to 20% premium to DCF, because investors had such a high opinion of management's ability to win new projects. But this has not really come to much and over the last year, they have been particularly unlucky. One asset sold by Tenaga went to Malakoff and the three new licenses issued by the government went elsewhere too.

Now YTL and five others are bidding for a $450 million power project owned by Teknologi Tenaga Perlis Consortium," the analyst continues, "but we've heard that it's going to go to a new group associated with Daim."

Specialists conclude that most likely reason for any new deal is to fund offshore expansion, since Malaysia does not want domestic companies financing overseas projects by taking ringgit offshore. YTL itself has already embarked on the beginnings of an international expansion program, buying a 33% stake in Australia's ElectraNet, in a sale completed in December last year.

During 2000, it also formed a strategic alliance with Hong Kong's CLP Holdings (China Light & Power), to explore opportunities in Malaysia and expand the company's current MW1,212 portfolio of two gas-fired plants in Terengganu and Johor.

Largely as a result of its share buy-back scheme, the stock price has climbed back up from a low of M$2.14 in July 2000 to M$2.70 as of yesterday's close (Thursday). According to one analyst's calculations, this represents parity to DCF. 

"The only reason that YTL used to trade at such a high premium was because of its strong management," the analyst states. "Malakoff, for example, has always traded at a 30% discount."

Having set aside M$500 million to repurchase up to 10% of its paid-in capital, the company has, to date, bought back about M$150 million, equating to 48.8 million treasury shares. This, however, is said to have resulted in a contraction of the company's free float, already small in the first place. 

Where a convertible is concerned, Malaysia's prohibition on short selling means that YTL will have to structure a deal along Taiwanese lines. Its potential credit spread will, therefore, be key.

Similar to Tenaga, to which it sells 70% of capacity through a 21-year offtake agreement, YTL is rated Aa1 by Rating Agency Malaysia (RAM). Tenaga itself lost its sovereign rating from the international agencies last autumn and is now rated one notch below at Baa3/BBB.

Malaysian spreads have also shown a worrying spike over the past month. Having consistently ground in for the past year, the whole spectrum blew out up to 50bp in the space of two weeks following an announcement by Standard & Poor's that it was revising the sovereign's outlook from positive to stable.

"This may have been the trigger, but there was more a general sea change in sentiment," one head of Asian fixed income research argues. "Investors were getting worried about political instability again and the likelihood of an adjustment to the currency peg. But for us, what was more significant was the fact that spreads didn't snap straight back in on the strength of domestic demand. It shows that perhaps there isn't quite the depth to the domestic bid as we supposed and it will be interesting to see how readily new paper from the country is embraced."

The sovereign's benchmark 2009 bond, for example, was trading at the 212bp level over Treasuries in late March, widening to a 250bp high last week and settling back again this week at a 215bp bid. Tenaga, against which YTL is likely to be most closely benchmarked, is trading at a bid/offer spread of 343bp/330bp on its recent 2011 global bond.

Convertible specialists, nevertheless, conclude that on paper YTL is a strong buy. As one analyst says: "Investors are desperate to diversify. Any deal that is not tech and not Taiwan will be welcomed with open arms."

"Only about 15 to 20 names in the Asian CB universe are trading at premiums below 50%," a second concludes. "Investors are desperately looking for the right names and the right stories. Equity issuance has been difficult from Indonesia, Thailand and Malaysia, but a solid credit like YTL offers investors a fantastic opportunity to play a volatile equity markets. Despite the recent blip, Malaysian spreads have also been big outperformers, so a convertible is a good structure for investors to capitalize on that too."
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