HONG KONG, Nov 20 (IFR) - SK E&S, a provider of energy services, priced South Korea's first full corporate hybrid yesterday, but the deal struggled to tighten pricing and received a weak reception from US investors.
The 144A/Reg S US$300m 60-year non-call five priced at 4.875%. This is the first offshore bond ever issued by SK E&S.
The final pricing was the same as initial guidance, unlike previous Asian hybrids this year such as PTTEP that were able to tighten pricing from the starting point. One syndicate banker on the deal said the initial price guidance was pretty aggressive.
"We would have liked to tighten a bit," he said. "But given the investor feedback, the initial price guidance was where most investors had a high level of confidence that the deal will do well in secondaries."
The new bonds were trading around 100.25 this morning.
Relative value was calculated by looking at outstanding Asian corporate hybrids such as PTTEP, Li & Fung and Sinochem. Among them, similarly-rated PTTEP was one of the closest comparables. PTTEP's notes were rated Baa3 by Moody's and BBB- by Standard & Poor's with stable outlooks. SK E&S's bonds are expected to share the same ratings, but with negative outlooks. Both companies are also related to the energy sector.
The state-owned Thai energy company's hybrids were trading at a yield-to-call of 4.3% with a call date in 2018. Considering a one-year curve extension worth 15bp to take into account SK E&S's November 2019 call date and adding a new issue premium, fair value was seen at the mid to high 4% area.
Still, the deal attracted a few high-quality European investors, who accounted for 43% of the total deal, marking one of the largest European allocations for an Asian hybrid seen recently.
Europe took 26% of PTTEP's hybrids, and accounted for 13% for Sinochem's deal.
SK E&S's deal was less attractive to US investors, who only took 2%. Asia accounted for the rest.
"The structure is something that US investors aren't entirely comfortable with yet," he said. "We need more education about this into the US. It doesn't help that there were no outstanding US dollar bonds."
PTTEP and Sinochem's hybrids had allocated 29% and 10% respectively to the US.
One credit analyst said the senior to subordinated differential for PTTEP at 2.4 times its senior multiple was slightly narrower versus SK E&S's 2.6 times, if SK Energy's senior bonds were used. But the analyst added that a larger premium could have helped because PTTEP was state-owned with a stable outlook and less leverage.
He added that the 25bp step-up in year 10 and 75bp step-up in year 25 gave the company less incentive to call the bonds that have rolling maturities, which was a concern given the company's weak financial metrics.
The deal was also marketed on a day of heavy competition, with familiar names such as Bank of China Group Investment and NTPC in the market.
But investors who bought the deal had confidence in the story behind why the company was doing a hybrid, and how the bonds would help shore up its balance sheet, said the banker.
S&P lowered its outlook on E&S to negative from stable in August due to its view that the company's financial metrics will deteriorate in the next two years because of aggressive capital investments and high dividend payouts that are likely to lead to negative cash flows.
The proceeds from the hybrid will not only free up cash, but will also keep its debt levels in range, thanks to receiving 50% equity credit from both agencies for the first five years.
That could limit some of the impact of its worsening adjusted debt-to-Ebitda ratio, which is forecast to rise to as much as 3.0x next year from 1.9x in 2013.
Korean insurers were not expected to show up in droves to buy the deal as regulators said the securities would count more as debt than equity on insurer balance sheets, raising their risk-weighted assets and lower capital ratios. The rolling maturity structure would make these bonds an even heavier burden on their balance sheets, said the banker.
"The deal lacked sponsorship in Asia with books around USD700m when we left the office and the fact that Korean insurers weren't there was a bit of a concern," said a credit analyst. "It also came in a difficult week where trading desks are trying to de-risk by year-end."
Funds bought 73%, private banks 16%, banks and others 9% and insurers 2%.
Barclays, Citigroup, Goldman Sachs International, JP Morgan and UBS were joint bookrunners. (Reporting by Frances Yoon, editing by Daniel Stanton.)