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Time for Khazanah to grow up

By Rev Hui
10 Jun 2014

A resurgent Asian equity-linked primary market took a slap in the face last week after Khazanah Nasional pulled an exchangeable sukuk worth as much as $750m after it failed to achieve the pricing it wanted despite plenty of demand. While Khazanah is unlikely to be damaged by the incident, it needs to recognise that its actions have consequences for the rest of the market.

As far as repeat issuers go, you would be hard pressed to find a name bigger than Khazanah in Asia’s equity-linked market.

Investors are always keen to get their hands on whatever the Malaysian government’s strategic investment fund has to offer. Its blowout S$600m ($485m) exchangeable sukuk last October was a case in point, with more than 110 accounts bidding for a highly aggressive, zero coupon, negative yield, five year non put three deal.

While most issuers would have been delighted with such terms — especially in a market that is only beginning to show signs of recovery following two dreadful years in terms of volumes — Khazanah is not one of them.  

Last week it decided to take things a step further by asking investors to commit to similar pricing terms, but this time as a five year bullet.

The longer dated zero coupon paper was marketed at a yield guidance of zero to minus 0.25% and a conversion premium of 10%-20% over the underlying stock – power firm Tenaga Nasional. A 23% implied volatility at the investor friendly ends against 100-day historic vol of 15%-20% showed just how tight pricing was.

Not that investors were completely put off. The books were covered at the investor-friendly end of guidance and everyone was expecting Khazanah to seal the deal and join the flood of equity-linked transactions that had priced in May – a prodigious nine companies raising a combined $835m.

But that wasn’t good enough for Khazanah. The borrower shocked observers by pulling the transaction, with those close to the deal saying the issuer was only interested in executing a trade at the best terms for itself.

There's nothing wrong with pulling a deal if demand fails to live up to expectations, but what Khazanah wanted was simply unrealistic. Implied volatility at the aggressive ends would have been 29%. Investors may be desperate, but they are not stupid.

Khazanah’s decision to walk away from the trade was all the more perplexing given the fact that if it was really that keen in securing those terms, it could have simply launched the deal with fixed parameters. It chose not to, giving the impression it was interested in price discovery, but then showed its indifference to the market.

What Khazanah does matters: it can perhaps afford to try the market's patience, but others are not so fortunate. A successful convertible from Khazanah is normally enough to open the doors to others names in the high yield and unrated categories that investors tend to avoid when markets are choppy or sentiment is weak. At $6.35bn, equity-linked volumes for Asian ex Japan are higher this year than at the same point in the previous two years. But it doesn’t take much to derail the market.

When a company such as Khazanah knows it is not short of suitors, it can be hard to resist being choosy. But it should remember that its status confers on it a position of responsibility to ensure that it doesn't upset the market for others. 

And there's a more selfish reason too. A spurned lover never forgets, and Khazanah may find next time that one way or another, investors will make it pay for being fickle. 

By Rev Hui
10 Jun 2014