With the sukuk maturing last year and the borrower wanting to maintain a relationship with investors, Petronas went on a roadshow earlier this month for its new offering.
Before the roadshow, the A1/A- rated borrower was considering issuing a five year al-wakala sukuk alongside 10 year and 30 year conventional notes. But after one Japanese asset manager showed strong interest and placed a chunky anchor order for a seven year tenor, the issuer decided to add another tranche to the bond.
Active joint bookrunners Bank of America Merrill Lynch, CIMB, Citi, JP Morgan and Morgan Stanley launched the Reg S/144A trade at 10am Hong Kong time on Thursday, March 11. They set initial guidance on the five year sukuk at 135bp over Treasuries and guidance on the seven, 10 and 30 year conventional tranches at 150bp, 175bp and 220bp over Treasuries, respectively.
The five, seven and 10 year tranches were pitched against the borrower's existing dollar bonds. Its 5.25% 2019s were seen at a G spread of 132bp and the 7.875% 2022s were seen at 157bp. The 10 year was benchmarked against the 7.625% 2026s, which were spotted at 166bp.
Since the issuer did not have a 30 year maturity bond, the longest tranche was pitched against Aa3/A+/AA China National Offshore Oil Corporation (CNOOC)’s 4.875% 2044s, which were yielding 175bp.
The generous IPTs got the bond off to a good start, causing investors to swarm in. But at around 7pm the leads tightened guidance to 110bp, 130bp, 150bp and 190bp over Treasuries, respectively, for the four maturities.
“I thought that the IPTs of five and seven were of fair value and the longer tenors were 10bp cheaper, so I placed orders on all four as soon as books opened,” said a Hong Kong based fixed income investor. “But then when the final guidance was released, I was a little taken aback to see how much they had tightened, and I decided to drop all the orders across the four tranches.”
That investor was not alone, with other fund managers considering guidance too aggressive and deciding to give it a miss.
“I bailed out from the five and 30 year after the guidance announcement,” said a Singapore based fixed income investor. “Deals like this of course attract investors and we all expect some tightening. But in my opinion 20bp-30bp across the tranches was just a little too much.”
A Hong Kong based fund manager, who also did not buy the notes, said onshore accounts, as well as Middle Eastern investors, might have piled in, allowing the issuer to go as aggressive as possible in pricing.
“I believe there are many investors like me who gave up on the deal due to pricing, which I expect is the reason they raised less than expected $6bn-$7bn,” he said.
Pricing over size
However, bankers that ran the deal said the issuer made a conscious decision to opt for price over size. And in any case, with a $13bn book across the four tranches, the borrower still found plenty of willing buyers.
“We came out with comfortable levels of IPTs to build up momentum for bookbuilding, which is what really happened,” said a Hong Kong based syndicate official on the deal. “The pricing might have been too tight for some but our job is to take high quality accounts while eliminating those who are not willing to pay what we offered.”
Orders poured in after launch, apart from on the seven year, which drew more muted demand. The 30 year proved the most popular, thanks to a wave of interest from insurance companies, and it was unsurprising to see that tranche tightened the most — by 30bp.
“We could have raised up to $7bn, as planned, which investors during the roadshow asked for, but the issuer was not in an urgent need of money,” said a syndicate official at one of the leads. “In summary, the issuer chose aggressive pricing over a bigger size.”
A Hong Kong based IG credit analyst away from the deal agreed. “A bigger deal size calls for more new issue concessions, but for Petronas, which is sitting on net cash of $25bn, it does not make sense to pay up to print more than necessary. Five billion is appropriate for this pricing level.”
30s most popularThe biggest order book was for the 30 year tranche, reaching $4.2bn from 240 accounts. The tranche was sized at $1.5bn with a coupon of 4.5%, and was priced at 98.767 to yield 4.576%. The 10 year attracted almost as much interest, at $4bn from 220 investors, and the tranche also ended up at $1.5bn. Pricing was fixed at 99.125 with a 3.5% coupon, for a yield of 3.605%.
The $750m seven year tranche was priced at 99.390 with a coupon of 3.125% to yield 3.223%. The order book was $1.5bn and 110 investors participated. Finally, the 144A/Reg S five year sukuk, issued by Petronas Global Sukuk, was sized at $1.25bn and priced at par to yield 2.707%. The order book totalled $2.7bn from 200 accounts. (See table for investor and geographic statistics.)
Proceeds will be used for refinancing and general corporate purposes. The dollar bonds will be issued off a $15bn MTN programme, rated A1/A-. For the conventional tranches, Petronas Capital was the issuer, with a guarantee from Petroliam Nasional Berhad.
Deutsche Bank, HSBC, Maybank and MUFG were passive bookrunners while NBAD, HL Islamic and Dubai Islamic Bank were co-managers.