After weeks of speculation, the Republic of Malaysia entered the international bond markets for the first time this year, re-opening its 2009 global bond issue for $500m last Friday to a good market reception. However, market officials were less impressed with the government's selection process, which involved a direct mandate to sole lead manager Chase Securities, without a beauty parade or tender process, and no syndicate group.
Speculation had persisted that the Malaysian government was considering proposals from banks for a new bond issue, but the government decided to re-open its existing issue instead of arranging a new transaction, which could have been a benchmark 10 year bond.
The plan to launch the fungible deal was quickly brought to market by Chase late last week. However, market participants noted that Chase had not been involved in the original bond issue, arranged last May.
The deal, which carries an 8.75% coupon, was priced at 215bp over US Treasuries, to yield 7.977% - significantly tighter than the pricing of the original transaction, which was 330bp over. The issue was also at the tighter end of the discussed 215bp-220bp spread range. Market observers said most of the transaction was placed with US investors.
"When we approached the government with the prospect of a re-opening they said it was a great idea," said a banker at Chase. "The government wanted to get in and out of the market quickly, and the re-opening could be concluded within a day, unlike a new issue, which probably would have taken two days.
"The government had made it clear to us they did not want to raise all of the $850m in one go. With this in mind, the reopening was also advantageous because it added to the liquidity of an existing bond, rather than issuing a new benchmark that would risk being on the small side, at about $500m."
As is standard practice with re-opening an issue, Chase offered a premium to where the existing paper was trading, the banker said. "We priced the bonds at a slight discount of about 10bp over the bid price of the existing paper, which was trading at 205bp last Thursday," he said.
Chase felt Asian investors would have a lot of interest in the transaction, and the bank started the book building process locally. Regional investors committed $300m at the 215bp spread, and the European investor base committed $275m. This enabled them to reach the US market with a strong order book, and obtain interest for the deal at the tighter spread range. "If we had relied on the US investor base first, we would probably have seen hedge funds selling the paper, and we would have to price the deal at 230bp over," the banker said. As it was, the deal obtained an order book of $800m, and the deal was subsequently increased from $350m to $500m to soak up the excess liquidity.
Malaysia is likely to use the financing to help pay for maturing international bond issues, and wanted to take advantage of favourable spreads.
"The republic arranged the deal at a time when it did not need the money, but accessed the markets in a professional manner," said the banker.
Market opinion of the bond reopening was fairly positive, but there were criticisms about the process by which Chase was chosen as the sole lead manager. "The selection of the lead manager was not made on a level playing field," said one official. "There was no beauty parade and Chase was certainly not the only bank pitching a re-opening to the government." Market sources also claimed Chase's appointment as lead manager may have involved a conflict of interest, noting that Abdul Mutalib Alias, the political secretary to the finance minister is an ex-Chase employee.
Alias rebuffed the rumours: "All the banks had a chance to pitch, and they pitched very similar deals. Choosing the banks to be lead managers went through a decision making process in the ministry. I do not understand why there is such a case of sour grapes."
"The deal was good and priced well," said another market official. "The demand for Malaysian assets is very strong. However, the choice of lead manager was more questionable. Most of the sovereigns in the region have relatively transparent selection processes, but the Malaysian government took a much more autonomous approach."
Other bankers noted that it was strange the ministry did not use Salomon Smith Barney, lead manager of the original deal, in some capacity. However, other bankers defended the decision. "It is probably healthier to spread deals around, rather than sticking with just the same bank," said one banker.
The market was agreed that the syndication and pricing of the deal was successful. "It went very well, but seemed to be priced a little too cheaply compared to the existing paper on the day," said a syndicate official. "The spread for the existing deal closed at 205bp. Given that the lead managers were only trying to raise $350m, and they had $1bn worth of orders within 24 hours, they could have had the guts to bring in the spread by another five basis points."
"I think the deal seems to have gone fairly well," said one rival banker. "It was syndicated well and was decently priced, at a small premium over where one might have expected a reopening.
"One could question why the government decided to reopen its 2009 issue as opposed to setting a new benchmark with a new bond. Several banks did not give reopening bids because it did not seem to fit the needs of the government."
Banks are also pitching a Eu300m-Eu400m five year bond issue to the government. "We are sending them ideas, and so is everyone else," said one banker. "Arranging a euro deal means the government can go for a smaller sized transaction in the market, which would make it easier to place, rather than having to arrange a big dollar deal or being criticised for issuing in illiquid, smaller bonds in dollars.
Salomon Smith Barney lead managed the original $1bn, 10 year bond issue last year, which was controversially reduced from $2bn, lost HSBC and Nomura in the syndicate and was priced outside expectations.
The deal came to market at 99.268, with the semi-annual coupon of 8.75% and a price of 330bp over US Treasuries.
Telekom Malaysia is also reportedly seeking to tap the markets before the end of the year, although sources familiar with the company plans said that no banks have been appointed to lead manage any transactions yet. Malayan Banking is also a potential candidate, having issued requests for proposals for an international bond issue a few weeks ago. However, sources said there has been little news from the bank since then.