Investment-grade bond

IFR Asia Awards 2012
4 min read
Jonathan Rogers

In a frantic year for investment-grade fundraisings, Temasek Holdings proved that investors were willing to embrace new issues from Asia even at razor-thin spreads over record-low US Treasury yields. For redefining the Asian investment-grade curve, Temasek’s US$1.7bn dual-tranche Global is IFR Asia’s Investment-Grade Bond of the Year.

Temasek Holdings’ return to the US dollar bond market in July was a defining moment for Asian credit. The US$1.7bn 10.5- and 30-year Global underlined the enormous demand for high-quality Asian credit, allowing the Singapore state investment fund to price well inside its existing curve.

While that feat alone stood out in a year when investors still insisted on new issue premiums, the inverted curve between the two tranches made the deal even more impressive.

The transaction set a new, liquid benchmark for an issuer that is widely regarded as one of Asia’s top names, thanks to its increasingly rare Triple A rating. In particular, the tighter pricing benefited local Singapore issuers – a point underlined by utility company SP Power Assets with an extremely tight US$500m 10-year in September.

Temasek’s inverted curve starkly illustrated that there was nascent demand for long-tenor issuance from investment-grade Asia, and that Temasek and leads Citigroup, Deutsche Bank, Goldman Sachs and UBS had made the right call to tap that tenor.

Pricing a two-part trade with an ultra-long tranche is always challenging and puts leads’ pricing skills fully in the spotlight, with the risk of mispricing the curve high. Not only was that risk present, but Temasek was looking to price on extremely aggressive terms versus its implied curve.

One bank was even said to have dropped out of the syndicate when talk of a 90bp–100bp spread over US Treasuries first emerged – an illustration of the challenge at hand.

In the event, the 10.5-year came 30bp inside Temasek’s theoretical curve at US Treasuries plus 100bp, using the Treasuries plus 85bp bid-side print on the Temasek due 2019s at the time of pricing and building in the curve. Meanwhile, the plus 95bp pricing on the new 30-year saw the deal come in at 15bp inside Temasek’s theoretical curve, using the plus 110bp print seen on the issuer’s due 2039s at the time of pricing.

The deal’s timing was bang on, with pricing against a rallying Treasury market, enabling Temasek to price the lowest coupon – of 3.375% – for a 30-year maturity from an Asian issuer.

“They timed the Treasury market impeccably,” said Herman van den Wall Bake, head of Asian debt capital markets at Deutsche Bank. “And, in getting such a tight deal, they effectively repriced the whole Singapore corporate-dollar curve.”

With US Treasuries hitting record lows, the 10.5-year came at one of the tightest coupons on record from Asia, at 2.375%, while the 3.375% coupon on the 30-year came 22.5bp through a record Monsanto set that month.

To do so, Temasek made a smart decision to take advantage of a unique set of circumstances. In the weeks leading to the transaction, US stock markets had been nearing year-to-date records, but Treasury yields remained low, breaking their traditional correlation with equities.

However, in the run-up to a key Federal Reserve meeting in July, with bets on what sort of monetary stimulus would be put in place, investors became averse to risk and Treasuries rallied. The flight to safety was just the cue that Temasek needed.

At the close of bookbuilding, there were orders of US$7.6bn from 284 investors, including asset managers, pension funds, insurers and central banks. The decision to take the 144a route was entirely justified with 56% of the 10.5-year piece and 50% of the 30-year going to US accounts.

“The success of the deal underscores the confidence which the investing community has in the strength of Temasek’s resilient portfolio and the depth of its management team,” said Keith Magnus, head of investment banking for Singapore at UBS.

To see the digital version of this report, please click here.