Papua New Guinea’s $500 million debut sovereign bond marks an important step for the Pacific nation.
It is quite a feat. This is the third time the country has at least started the process of raising a sovereign bond. It tried through Barclays, BNP Paribas and JPMorgan in 2013, then met fixed income investors in 2016, but did not move to a formal roadshow.
This attempt, through joint leads Credit Suisse and Citi, faced particular challenges: a single B-rated first-time emerging market issuer, launching during a period of capital flight from the emerging world amid the threat of a US-China trade war and rising rates globally.
But the 10-year deal was seven times oversubscribed, tightened its price through the deal from 9% guidance to 8.375%, and could have raised much more than the $500 million it eventually took.
“While we conducted our roadshow during a volatile period for emerging countries, we believe the quality of our credit ultimately stood out and translated into the high demand for our bond,” says Charles Abel, deputy prime minister and treasurer of Papua New Guinea.
“As this was a first-time issuance by PNG, some investors were unfamiliar with our value proposition and economic fundamentals,” he adds. “Several were pleasantly surprised that we are one of the few emerging countries that actually enjoys a consistent current account surplus.”
PNG’s economic outlook has been transformed by the development of the PNG LNG project, by far the biggest infrastructure and resources project the country has ever attempted. A $19 billion project operated by ExxonMobil, it takes natural gas from PNG’s remote highlands and pipes it to processing and liquefaction facilities at the coast.
It is expected to produce more than 11 trillion cubic feet of LNG, and its construction gave the country several years of double-digit GDP growth.
Revenues from it will accrue to the government well into the late 2030s, Abel says. Numbers like these are appealing to investors and lenders alike, and the project has a powerful demonstration effect: Abel says the country is in discussions with oil firms to develop several other resource projects.
We are prudent in our approach as we do not want to be over-reliant on any single country- Charles Abel, deputy PM, PNG
“Drawing on the lessons learned from the PNG LNG project, we will work with oil majors to ensure that development periods for such major construction projects are more staggered, and cash-flow receipts to the government will be smoother, which should help facilitate our budgetary planning.”
But it certainly hasn’t all been easy. Declining oil prices have hit revenues from the project, and the country – already battling violence and corruption – has also had to deal with drought and an earthquake. Also, the previous government committed so heavily to spending that the budget deficit has increased to 2.5% of GDP, with public debt at 31% of GDP.
One bank that has been a long-term believer in the country is Credit Suisse, which in addition to being one of the leads on the bond was also responsible for one of the gutsiest lending decisions in the region in recent times.
In August 2016, it arranged a $500 million term-loan facility for the government, with the first tranche of $200 million drawn down at the outset (said to have been solely funded by Credit Suisse, though the bank won’t comment, and it may subsequently have been sold down). Further drawdowns came in January 2017 ($110 million), and the final tranche of $190 million in June 2018.
That seemed an enormous exposure to such a frontier country, but Credit Suisse gained confidence in the collateral of the country’s natural resources and its operational projects.
“Credit Suisse is an important partner for PNG who believed in the prospects of our country,” says Abel. He says that loan “laid the foundations for our inaugural bond issue.”
But the bond issue does not refinance the loan. It is understood that Credit Suisse wants the facility, struck at Libor plus 5.75%, to remain in place through its five-year life. The success of the bond makes that loan look a shrewder call than it initially did.
The bond helps with the foreign currency position.
“We expect the influx of US dollars resulting from the bond issuance will help alleviate the FX backlog we have faced and will also help to lower our overall financing costs over time,” says Abel.
“We believe it does provide us more credibility with the international investment community and is a vote of confidence in our ability to deliver on our growth plans in the coming years.”
Abel is keen to distinguish his government’s position from that of previous administrations, and notes that previous attempts to launch a sovereign bond came under them, not him. He says investors were impressed by a new-found fiscal discipline, anchored on a five-year fiscal framework announced last year.
Perhaps the bond also helps with an issue that is vexing countries all over Asia Pacific and beyond: the reliability of Chinese financing.
PNG owes more to China than any other Pacific nation, and under the previous administration awarded numerous contracts to two companies, China State Construction Engineering Corporation and China Communications Construction Company, both of whom have been blacklisted by the World Bank for fraud, corruption or collusion.
“PNG welcomes foreign investments and lending, regardless of whether it’s from China or our other trading partners such as Australia, Japan and New Zealand,” says Abel. “What matters to us is that when such capital is made available, it is put to good use for the development of our country and the progress of our people, and would not cause an undue financial burden to us over the long run.
“We are prudent in our approach as we do not want to be over-reliant on any single country.”