The Laos sovereign is waiting for approval from the Thai Ministry of Finance (MoF) to go ahead with its second international bond. The deal will be double the size of its debut issuance, with a longer tenor, but commentators believe there will be more than enough demand to cover the books.
At the end of last month, the Lao People’s Democratic Republic submitted a request to the MoF for approval to issue an international bond, denominated in Thai baht, worth THB3billion (US$96 million), according to a banker familiar with the development.
The Thai regulator grants approvals for overseas entities to issue in the domestic market three times a year. The last round of approvals was in May. If the Laos government gets the green light, this will be its second offshore deal. It first came to the market in May 2013, with a THB1.5 billion three-year bond.
“The first one was very successful, with an oversubscription and at the moment we will be speaking to investors until the approval has come through,” said a banker on the debut deal.
The first deal was issued with a 4.5% coupon, and was 2.7 times oversubscribed. The coupon was set before the deal came to the market, and the format will be the same for the second bond. Neither the coupon nor the tenor has yet been confirmed, but if demand is sufficient, the Laos sovereign would like to develop a curve, according to an official at the Laos MoF.
“We hope to do it sometime at the end of the year and we will look at something like five year or a seven year, our plan is to develop the yield curve for the bond as we have a three year already,” he said.
The debut bond was offered at a 175 basis point (bp) premium to underlying Thai sovereign bonds. Thailand is rated ‘BBB+’ and the Laos sovereign is unrated. Since June, yields have risen across emerging markets. If Laos was to issue a five-year bond at a similar premium to the Thai sovereign, it would yield around 5.15%.
Despite having an outstanding bond, the new deal will not be priced from secondary market levels as, according to the Laos MoF official, the first bond has not been traded. It was issued in the form of a private placement, to Thai pension and investment funds as well as high-net-worth-individuals (HNWIs) and he believes the investor base for a second deal would be similar.
Diversification play
The debut bond was almost three times oversubscribed and commentators believe that demand for another deal would be similar, despite the fact it will be double the size.
“Our bond is a sovereign bond and there are not many of those right now in the Thai market, so it offers a good alternative for the investor to diversify. Then the size is not that much, it is US$100 million, so it’s still very small compared to some of the corporate bonds,” said the official at the Laos MoF.
Once the issuance has been approved, he will take the deal on a roadshow with the same underwriters as were on the first deal – sole lead manager TMB Bank and Laos firm Twin Pine Consulting as adviser. The timing will depend on the market response to the bond, said the official.
But market participants expect there will be no problem generating demand.
“In terms of its absolute size this will just be a drop in the bucket for some of these investors, and it’s something interesting for them to pick up. It’s almost too small not to be picked up. Even in relation to the size of Laos, it’s a tiny issue, they’re still just testing the market I don’t think there’ll be problems with demand, even with the turn in market sentiment,” said one Bangkok-based head of research at a consulting firm.
Laos issued its debut bond just as market sentiment was becoming more bearish on fixed income as US Federal Reserve chairman Ben Bernanke indicated that the country’s quantitative easing programme might be coming to an end.
However, as a majority of the buyers will hold the bond to maturity, technical factors are likely to be less of a consideration. If anything, global factors mean the bond will offer a slightly higher yield as it will price relative to the Thai sovereign, he said. But most importantly, the Laos story remains the same.
“The way they’ll pay the bond back is through copper and electricity exports, and those businesses are pretty much a lock-in as it’s much cheaper for Thailand to import from Laos. So from a Thai investor perspective I don’t think they’ll have any problems taking it up. There will also be an institutional political imperative to take it up which will help too,” said the Bangkok-based head of research.