Complaints about lack of transparency on the Malaysian government’s award of the mandate for its euro-denominated bond issue have been dismissed by participants in the deal.
Though formal invitations to bid were not circulated, the issue was “no big secret”, says a Deutsche Bank source, who adds: “Everyone had ample time to respond.”
Deutsche Bank and Barclays Capital were joint lead managers, while co-managers were ABN Amro Bank, CIMB bank, Dresdner Kleinwort Benson, HSBC, JP Morgan and Schroder Salomon Smith Barney.
It was Malaysia’s first foray into the Euromarket since a now-matured Deutschmark floating-rate issue in the mid-1980s, and was apparently almost two times oversubscribed.
The government was aiming to sell its story to European investors, hence despite strong interest from Asia, priority was given to Europe and most orders from there were met.
“The majority went to European investors, although there were quite a few orders from Asia but the issuer’s whole objective was not to place it back to Asia. We could not fulfil both 100%, but there has got to be a bit of give and take to some extent,” says one banker.
“Given it was the first euro transaction for a sovereign out of Asia this year it went very well,” he adds.
Barclays Capital says the issue opens the way for Malaysian borrowers to tap the euro-denominated market in the future. “The transaction successfully achieved Malaysia’s objective of diversifying its funding sources through establishing long-term relationships with a broad range of European investors,” says Barclays.
The government wanted to diversify its funding base and its international reserves, adds another source close to the deal.
Hence, despite earlier talk of a swap, the ministry of finance had chosen to retain euros – a particular issue given Malaysia’s fixed exchange rate, which is widely believed to undervalue the ringgit. “It was not swapped.
There was no immediate need to swap,” says the participant.
Although the issuer did not swap, there was some asset swapping by investors, he says. On a swapped basis the euro was put at around 220 basis points over US treasuries, against a similar dollar-arranged issue at maybe 180bp.
Some are using such a rationale as a basis for claiming the issue was “cheap”, although others point to the necessary premium associated with a first-time issuer in the currency.
The e650 million issue – slightly more than the e500 million originally intended – has a five-year maturity and a coupon of 6.375%. It was priced at 149.5bp over the German OBL 136 and 141bp over the French BTAN 2005.
It follows a nine-year $500 million issue by the government in September priced at 215bp over US treasuries as an addition to its existing $1 billion bond already in the market, which was trading around 232bp, against a 3bp to 4bp tightening in the spread on the latest euro issue. Chase Manhattan led the dollar deal.
“In the US they were fairly comfortable with where their pricing was, and the response from US investors. Europe is a new market and this will re-establish a liquid benchmark for Malaysia,” says the banker.
Malaysia’s economic sustainability was the key focus of discussion during the bond’s roadshow, which hit Amsterdam, Frankfurt, London, Milan, Munich and Paris.
UK and German investors took large chunks of the issue, while around a third went to Asia and the remainder was spread across the rest of Europe.
Vincent Low, a fixed-income analyst for Asia with Merrill Lynch, estimates that the Malaysia euro deal commanded a premium of 30bp to 50bp when compared with the spreads on the country’s 2009 dollar issue. “In terms of pricing it looks fairly well bid,” he says.
“Their intention was to have a benchmark for the European market. It is an experimental foray but they wanted to tap a new investor base in Europe and they wanted to set a benchmark for the sovereign which I think has been achieved by and large, albeit at a cost,” he adds.
Although there were “surprisingly few” questions from would-be investors, those that were forthcoming concentrated on whether Malaysia’s economic recovery would be sustainable against the background of slowing US and global exports.
“It was surprising, in most of the venues that we went, not much was asked.
In Germany, Italy and Paris, virtually nothing was asked,” says the source.
“Even though the crisis hit Malaysia, it was manageable to a large extent and the sovereign rating never dipped below investment grade,” he says. The issuer was rated Baa2/BBB.
Comparisons have been drawn with Thailand and South Korea, whose ratings did briefly slip below investment grade. “We had the fundamentals to prove it was strong,” he adds.
Malaysia was only the second sovereign in Asia to issue euros, following last year’s launch by the Ba1/BB+ -rated Philippines of a e350 million five-year bond priced at a margin of 425bp.
Proceeds of Malaysia’s issue will be used to repay existing foreign debt and boost its foreign currency reserves.
The country’s foreign debt was expected to rise by some five times, to M$5.1 billion (US$1.34 billion) next year, some of which will be used to fund an expected budget deficit as the government attempts to increase economic growth.
The sovereign’s lead into the euro market also paves the way for other issues, with Telekom Malaysia at the forefront of the list.
Deutsche Bank also has secured that mandate, along with joint arranger, Merrill Lynch.
The majority state-owned telecom company was expected to launch a $250 million bond at the end of November, making it the first non-sovereign international issue from Malaysia for more than a year.
The issue was being done as a Rule 144a private placement of a Baa2/BBB-rated 10-year bond. Roadshows touched Hong Kong and London as well as the US in a bid to raise the funds for repayment of existing debt as well as the company’s capital expansion plans.
Bankers were hoping investors would regard Telekom Malaysia as a “sovereign proxy”, rather than tar it with the less favourable brush associated with some other telecom companies recently, but there were also concerns at the relatively small size of the issue.
Telekom Malaysia has not issued an international bond since its $500 million two-tranche issue in 1995.
