YTL Power readies CB

The independent power producer will begin formal pre-marketing of a $150 million convertible next week.

Credit Suisse First Boston and Deutsche Bank are joint lead managers of a five year bullet deal that will mark the first equity-linked offering from Malaysia since June 1997.

Informal soundings in the credit market suggest that the deal will be marketed at about 150bp over Libor on an asset swap basis. At this kind of spread, it will seem aggressive relative to oustandings, but for dollar investors in particular, will represent a welcome diversification from the dominating troika of Telekom, Tenaga and Petronas.

Local bankers say that the deal's small issue size, but more importantly, the value and rarity of the YTL credit are the main drivers. Baa2/BBB-rated Petronas, for example, has a comparable October 2006 transaction outstanding at 192bp/182bp over Treasuries, or about 110bp over Libor. Baa3/BBB-rated Tenaga, on the other hand, has an April 2007 bond at 270bp/255bp over, or about 200bp on a Libor basis.

Despite the fact that both Tenaga and YTL have the same implied credit rating, lead bankers are likely to have argued that the latter deserves tighter pricing because it has not been hit by the same recent cash flow concerns of the former and has had prices fixed for 70% of its output through a 21 year off-take agreement.

Against the one true outstanding in the Malaysian convertible universe, however, the spread does look aggressive, particularly as CB asset swaps normally trade about 30bp wider than straight debt. Malaysia Telekom's October 2004 is currently bid at 269bp over Treasuries on a yield-to-maturity of 6.532%.

Although no terms have yet been released to the market, the deal is said likely to have a premium redemption structure, meaning that part of the interest payment will be back-ended, with a lower coupon and higher yield. There will also be no put option, but the deal will be callable.

In the wider Asian convertible market, the two most obvious comparables are Baa2/BBB-rated China Mobile and Chartered Semiconductor, which has a BBB- rating. Both companies have recently issued five year bullet deals, with two year call features. The main difference between the two, is that whereas China Mobile had a par redemption structure, Chartered opted for premium redemption.

The former priced a five year deal on a coupon of 2.25% and conversion premium of 23% to yield 2.25%. There was also a two year call with a 120% trigger. The latter priced a five year deal with a 2.5% coupon, 33% conversion premium, yield-to-maturity of 5.25% and premium redemption at 115.493%. It also had a two year call, with a 125% trigger. 

Because of the short selling restrictions on the Malaysian market, YTL Power's deal will not have much of an equity option, but it will have the kind of standard mid 90's bond floor of most 'broken' convertibles, particularly those from Taiwan. 

Its premium redemption structure is one that appeals heavily to companies convinced of their stock's upside potential. Year-to-date, YTL has outperformed the Malaysian market, trading flat to Thursday's M$2.81 close, against a 16.488% decline in the overall index.

Since last September, the company has been utilizing a M$3.5 billion ($921 million) cash pile to buy-back up to 10% of its paid-in capital, in the process pushing its share price up from an M$2.14 low in July 2000.

Earlier this month, it also announced that it had finally been able to break out of its straight jacket and enlarge its power portfolio beyond MW1,221 in generating capacity from two gas-fired plants in Terengganu and Johor. It said that it will pay $1.3 billion for a 49% stake in a MW1,400 coal-fired plant in Negeri Sembilan. The remaining 51% will be held by Jimah Holdings, owned by the State's royal family.

News of the announcement saw the stock record its highest one day gain in almost three years, jumping from M$2.8 to M$3.02.