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Thursday, 20 June 2019

First mover

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Renewed optimism in the weeks that followed Thailand’s military coup gave PTT the chance to open a new market for hybrid capital with a landmark US dollar issue.

An anti-government protester kisses a police officer during a rally inside a compound of the Thai Royal Police Club in Bangkok.

First mover

Source: REUTERS/Athit Perawongmetha

An anti-government protester kisses a police officer during a rally inside a compound of the Thai Royal Police Club in Bangkok.

When troops took to the streets of Bangkok in May, global investors feared the worst for Thailand. But only weeks after the military ousted the country’s dysfunctional government, Thai companies were back in the international arena with structures that looked more at home in a bull market.

State-owned energy company PTT Exploration and Production reopened the US dollar debt market for Thai issuers on June 11, barely three weeks after the May 22 coup.

“Thailand is in a perilous state. We were expecting investors to express concerns about the political situation in the country. When we saw the quality and the size of the order book, we felt comfortable to increase to US$1bn and to print tighter.”

More remarkably, it did so with a US$1bn corporate hybrid that beat all expectations of size and price, coming 37.5bp inside initial price guidance at a yield of 4.875%.

“The deal met the company’s expectation by achieving our funding objective and strengthening our financial position at a competitive price despite the political pressure in Thailand,” said Penchun Jarikasem, executive vice president, finance and accounting group, PTTEP.

Leads Bank of America Merrill Lynch, Credit Suisse, HSBC and JP Morgan had planned for an issue size of US$500m–$750m and had placed their bets on selling the bonds at a yield of 5%.

The deal drew enormous interest from investors worldwide, ending more than five times oversubscribed with over 300 orders in the book.

“Thailand is in a perilous state. We were expecting investors to express concerns about the political situation in the country,” said one banker involved in the deal. “When we saw the quality and the size of the order book, we felt comfortable to increase to US$1bn and to print tighter.”

The junior securities are senior only to equities in the capital structure, meaning they are second to last in line for recovery of assets if PTTEP goes into bankruptcy. They also include dividend stoppers, so that coupons are not paid if the company is losing money.

The bonds have no maturity and the coupon resets to the original spread over five-year US Treasuries in 2019 with no coupon increase until 2024, when it resets to the original spread over mid swaps plus 25bp. The next reset, only in 2039, is to six-month Libor plus the original spread and 75bp.

That structure earned PTTEP 50% equity credit from Standard & Poor’s (for the first five years) and from Moody’s, while the undated notes count as 100% equity for accounting purposes.

That meant the company could raise funds without putting pressure on its credit rating of Baa1/BBB+, while at the same time taking advantage of the low interest rate environment before any increase in US base rates.

Investors had tried to push back initially. A real-money analyst said a group of institutional accounts had asked for a step-up to be included in the event the bonds were downgraded below investment grade. That could be triggered by a prolonged military rule, according to one rating agency analyst.

On the back of a strong feedback during the roadshow, the deal went ahead without the downgrade step-up clause, and a gain of more than one point the following day more than justified the price.

“At first, there was uncertainty over investment sentiment following the military coup on May 22. Political tension, however, has had no impact to the recent hybrid bond issuance and our future financing plan,” said Penchun.

“PTTEP’s strong credit rating through disciplined capital management is the main reason behind investors’ confidence.”

PTTEP is the flagship oil company in Thailand, with PTT PCL, formerly known as the Petroleum Authority of Thailand, as majority owner. Curfews are still in effect in Bangkok, where a military junta has been ruling the country since May 22, when a coup replaced the government of Yingluck Shinawatra.

Fund managers and insurers bought 79% of the junior subordinated perpetual bonds, banks bought 6% and other real-money accounts bought 5%, leaving private banks with 10%. Allocations reflected the depth of global demand, with 45% going to Asia, 29% to the US and 26% to Europe.

PTTEP’s hybrid took on extra significance the following week, when Krung Thai Bank emerged with Thailand’s first Basel III-compliant capital raising in the US dollar market, eventually raising US$700m of Tier 2 capital at a yield of 5.2%. As the first mover after the coup, PTTEP proven a deal was possible, even with a complex structure.

To see the digital version of this report, please click here.

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