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Thursday, 22 August 2019

Frontier Markets Bond

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The Independent State of Papua New Guinea put itself firmly on the map for global fund managers with a wildly popular debut sovereign bond, proving that the capital markets can provide essential growth funding even in torrid conditions.

Papua New Guinea ended a 20-year journey to the international bond market in some style, raising US$500m at a 10-year tenor – a rare feat for a first-time issuer with lowly ratings of B2/B (Moody’s/S&P).

The deal was all the more impressive after three failed attempts in previous years and given that it priced in September, in the middle of an emerging-market sell-off that had sent Asian credit spreads soaring.

Hints of a successful deal became apparent during the roadshow, as global emerging-market investors quickly expressed interest in a debut sovereign issuer with a wealth of natural gas reserves.

Investors jumped at the opportunity to invest in a debut emerging-market credit that was also offering attractive returns. Some even thought that the deal could offer a hedge against volatile conditions that had hit broader markets. The combination of these factors was a huge hit when the deal went live.

Guidance was tightened 62.5bp from initial price thoughts – one of the most aggressive revisions of the year – before the deal priced at par to yield 8.375%. The order book was more than six times subscribed at reoffer, underlining the diversity appeal of a new frontier credit.

Demand from emerging market specialists in the US was impressive, as the decision to opt for a 144A/Reg S offering paid off. The US accounted for a whopping 56% of the bonds, while Europe took 27% and Asia 17%.

Papua New Guinea’s choice of a 10-year maturity over the far easier five-year standard was especially noteworthy amid fears that rising US interest rates would affect demand for long-dated debt, even though the US Federal Reserve raised its benchmark rate during the week of pricing.

Global EM investors backed the longer tenor, allowing proceeds to be used to support liquefied natural gas and mining projects that will drive the country’s medium-term economic growth, but which will take a few years to make a difference to GDP.

The 10-year tenor also gave Papua New Guinea the opportunity to extend the weighted average duration of its debt and opened up a new way to diversify away from expensive local borrowing that had stoked inflation.

Papua New Guinea had first mooted a global bond two decades earlier, and its long-overdue debut paves the way for the country to return to the international markets to fund future development plans. Credit Suisse was global coordinator for the deal, and also joint lead manager and joint bookrunner with Citigroup.

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

To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

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