An ambitious acquisition spurred multiple financings in Thailand’s oil-and-gas sector and led to the country’s first corporate hybrid. For its smart application of a novel structure, PTT Exploration and Production’s Bt5bn 5.85% perpetual is IFR Asia’s Thailand Capital Markets Deal of the Year.
A rare hybrid bond was a smart move for PTT Exploration and Production, which used various forms of financing during the year under review to pay for its US$2.2bn acquisition of Cove Energy PLC and to fund capital expenditure.
PTTEP became Thailand’s first corporate issuer of a perpetual bond, the only previous ones having come from the financial sector, namely Krung Thai Bank and TMB Bank.
The hybrid from PTTEP, a 65.29%-owned unit of top Thai energy firm PTT, was the ideal way to open the market for other top Thai entities.
PTTEP’s baht-denominated perpetual bond stood out from other paper not just because it met the company’s financing requirements, but also because it introduced a new investment option for local investors looking to deploy cash.
The policy rate in South-East Asia’s second largest economy had remained low throughout 2012, which gave issuers an opportunity to lock in low-cost funding for a long time – and PTTEP was quick to take advantage.
Retail investors took up 70%–80% of the Bt5bn (US$163m) issue. The bonds have a call option after 10 years. A 5.85% coupon is payable for the first 10 years, before it steps up to 6.10% from 2022 to 2042, then to 6.85% up to 2072, and 7.85% until maturity.
Half of the issue size received equity credit from credit rating agencies S&P and Tris, while the full issue size is recorded as equity on PTTEP’s balance sheet. Additionally, 100% of the coupon is tax deductable.
The structure gave the issuer a boost to its permanent capital base with no dilution to its existing shareholders and, as only 50% of the issue is treated as debt, it had no impact on PTTEP’s gearing. In terms of pricing, the borrower will pay 4.5% after accounting for tax during the first 10 years, while enjoying equity treatment. Furthermore, its cost of equity is approximately 15%.
The deal presented a number of challenges, not least because the Thai SEC was warning retail investors about the risks involved in perpetual securities.
The SEC was concerned that investors would not know the difference between hybrids sold from banks and those from corporate issuers. In the case of the bank perpetuals, the banks can defer coupons only if they record financial losses or sharply lower profits.
In the case of PTTEP, however, the deferral of coupons is completely at the issuer’s discretion. The SEC noted that the longer the coupons are deferred, the lower the return rate is for investors.
Joint leads Kasikornbank, Krung Thai Bank and Siam Commercial Bank had to convince investors by educating them of the pros and cons of the perpetual. The also held discussions with the market watchdog to explain PTTEP’s objectives and the hybrid’s terms and conditions.
Despite the relatively small step-up in coupon payments after year 10, the leads told investors that the equity credit was given only for the first 10 years, after which the instrument would be treated as debt. That helped provide reassurance that the company would exercise the call option, since there was no incentive for PTTEP to hold it for more than 10 years and pay interest as high as 5.8%, relative to normal debt available at around 4%.
The limited take-up of institutional investors was blamed on confusion over the SEC’s rules on whether certain groups of investors, including insurance and co-operative funds, could buy the PTTEP perpetuals. Approval finally came through, but it was too late as books had closed for the institutional tranche.
The Thai baht hybrid was a neat fit in PTTEP’s capital structure. It complemented a US$500m 30-year bond from PTTEP that came at 6.35%, while the company was in the market with a US$3bn share placement at the end of November.
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