A year is a long time in the capital markets and who better to demonstrate it than those consummate Financial politicians in Malaysia.
In December 1998 the government borrowed $1.25 billion and ¥11.6 billion from the 12 foreign banks in Malaysia. It cost 290 basis points over Libor.
A year later that quasi-bilateral arrangement was formalized into a syndicated loan from 26 banks and repriced at 120bp over Libor for the dollar portion and 107.5bp over Tibor for the yen tranche. Another nine months later and the loan, which matures in 2004, has been repriced again, at 52bp over Libor for both currencies, with the number of participating banks rising to 29.
So did the Malaysian treasury make a straightforward commercial renegotiation to take advantage of improved rates or were the goalposts moved and the banks held to ransom?
“When Malaysia’s credit quality improved they saw a need to look at how they could refinance with something cheaper and remove some of the covenants which were no longer commercial requirements,” says Jerry Yeo, head of capital markets at lead-arranger HSBC Malaysia. His reasoning would seem to point to the First view-point and by and large the loan participants seem to have taken the repricing in their stride.
“The credit rating is such that it now represents a fairly reasonable price and it is probably going to get Finer,” says Bank of Nova Scotia’s managing director in Kuala Lumpur, Rasool Khan. “It probably makes a very attractive portfolio.”
Yeo says the reasoning behind the government’s request for repricing was two-fold. Firstly market conditions had improved and secondly it wanted to set a benchmark to enable the country’s large state enterprises, including Petronas, Tenaga and Telekom Malaysia, to refinance their debt. The original loan agreement made provision for repricing and changes to certain terms and conditions, some of which required majority agreement from lenders and others, such as a change in margin, which required unanimous support.
The original loan had a covenant allowing for an adjustment in spread after the First year of a progressive 12.5bp for every incremental change in credit rating, either up or down but to a minimum of 75bp. That covenant has now been deemed to have been superseded and has been removed, says Yeo.
“We had a very good response in terms of the banks’ agree-ment,” says Yeo. The argument appeared sound. Credit spreads are improving and eventually the loan would be refinanced at around that price anyway. In the absence of other “quality assets” in the region, the repricing was a “commercial reality”.
The pitch to the banks was simple: “Either you maintain your investor position or face refinancing with a potential reduction in size,” says Yeo. “We were able to create enough tensions in the market in terms of comparisons to prove to the banks – ‘live with this pricing or be refinanced’.”
The original bilateral facility was largely a “symbolic” participation by foreign banks in Malaysia, says Yeo. The 1999 version was “driven on commercial terms” and was over-subscribed.
By and large there was consensus on the new pricing though “somebody always wants more”, says Yeo. He points to the subsequent repricings by state enterprises as justification for the pricing. Petronas has raised a new $323 million loan in two tranches at 75bp, Telekom Malaysia has refinanced $350 million at an average of 80bp against an original spread of 100bp and Tenaga is in the process of refinancing $200 million which it is hoping to bring down from around 100bp to 52bp over a 1.7-year average life. There was also a “goodwill” element in participation, which had the added advantage for on-shore foreign-owned banks that it counted as Bumiputra-status lending on their books and thus potentially commanded a premium in making up the required loan allocation requirements to indigenous Malay borrowers. The banks thus seem happy with the new pricing and accept that in the last year market conditions have changed.
Khan says: “Nobody is happy that the interest rate is being reduced but it is a choice between keeping an asset and letting it go. I am not happy if I am losing income but in terms of risk-return the Malaysian government portfolio is probably very reasonable.”
Bank of Nova Scotia started off with $100 million of the original bilateral loan, underwrote $130 million of the refinanced syndicated loan and has since brought that down to $30 million after selling down the remainder. Malaysia’s long-term foreign currency credit is now rated Baa3 by Moody’s and BBB by Standard&Poor’s.
