Reg S is not just for ‘Asian-linked’ credits, SGSP insists

Lead manager data reveal that books reached US$1 billion by the middle of the Asian day and around US$2 billion at the European open, at which point price guidance was revised to 135 basis points area over UST for no-grow final volume of US$500 million.

SGSP is a repeat Reg S issuer, with the latest transaction being its third in this format. The company is co-owned by State Grid Corporation of China and Singapore Power, but David Gillespie, Melbourne-based general manager, corporate finance at Jemena – the operating asset subsidiary of SGSP – tells KangaNews ownership ties in Asia have become less important in the Reg S market.

This marks a major change from the issuer’s earlier Reg S deals, priced in 2012 and 2016 – which Gillespie says would have been harder to complete if the issuer lacked Asian linkage.

“Right now I’d argue that diversification is a much greater focus for these investors than parentage in or links to Asia,” he adds. “We have received very strong feedback from investors, both at and outside roadshows, that they are starved for diversity outside of key Chinese credits. If a high-quality name from a high-quality jurisdiction, like Australia, offers this diversification it will get a very positive reception.”

In fact, Rob Kenna, head of debt capital markets origination at CommBank in Sydney, says the Reg S option should at least be on the radar of a wider group of Australian issuers than those with ownership links to the Asian region. “There’s no doubt SGSP benefits from the name recognition its ownership affords, but Reg S investors are also keen on diversification,” he comments. “In this context, SGSP gains just as much benefit from being a truly Australian credit with the profile of a regulated utility in the Australian market.”

Simon Ward, head of debt capital markets Australasia at Mizuho in Sydney, says the US dollar Reg S market has picked up its execution consistency in recent times, and noticeably so in the past year. “The UK referendum in June last year caused most global markets to pause – including the US – but US dollar Reg S deals continued to print more or less unabated,” he reveals. “This has continued to be the case ever since, whereas in the past Reg S has been more prone to volatility.”

The Reg S investor base is also increasingly high quality. “There is a view in some parts of the market that Reg S issuance is driven by the private bank bid, but we certainly didn’t experience that in this case,” Ward says. In fact, just 1 per cent of the SGSP bonds went to private banks with the majority acquired by high-quality, real-money accounts (see table below).

SGSP Reg S deal distribution by investor type

Source: Mizuho Securities 3 July 2017

The deal was predominantly sold into Asia, at 83 per cent, with the balance roughly evenly split between EMEA and Australasia. Ward says some European and Australian investors fed back to the leads their preference for an SGSP transaction denominated in their local currencies – which he says demonstrates that the issuer retains capacity to visit other markets in due course.

The Australian investor component largely came from local accounts with global portfolios including natural US dollar interest, Kenna tells KangaNews. Another group of Australian buyers – those with pure Australian dollar funds but mandate flexibility to swap back foreign-currency exposures – likely found Reg S pricing to be too close to global curves.

“The Reg S market prices pretty efficiently so these buyers are unlikely to find a pickup under most market conditions – which means there are natural constraints on the Australian-origin bid,” Kenna explains.

Gillespie also highlights the high-quality nature of the latest deal’s investor book. Although SGSP’s 2016 Reg S issue attracted an even larger oversubscription – its book was U$4 billion, for a US$500 million print – Gillespie points out that the issuer achieved its tightest print relative to UST this time.

“The pricing trend is the one I’d highlight, because I think it reflects both the development of the Reg S market and the work we have done to build out a curve,” he comments. “The bottom line is that we had much more confidence in the pricing outcome and execution risk this time round, notwithstanding the ‘blowout’ book the 2016 deal attracted.”

Pricing certainly appears to be competitive. Ward says SGSP’s headline margin – 132 basis points over US Treasuries (UST) – equated to around 165 basis points area over bank bills in Australia prior to swap charges. The new issue concession on final pricing was 0-2 basis points, Ward adds.

He continues: “Our guide for Australian dollar 10-year issuance at the time was 165-170 basis points over swap area, so we view SGSP’s result as like-for-like pricing – with the additional advantages of greater volume and investor diversification.”

A key advantage of the scale and consistency offered by the Reg S market is that it allows a borrower with the substantial requirement of SGSP – one of Australia’s top 10 corporate issuers by bonds outstanding according to lead-manager data – to achieve issuance diversity without having to take a further step to the US 144A market.

Gillespie tells KangaNews the domestic, Reg S and euro markets are SGSP’s core funding options with other currencies also available for complementary issuance.

He adds: “The most positive thing about Reg S development is that we can now view it as a consistent funding option based on a real-money, buy-and-hold driven bid that is there for issuers to use on a repeat basis. It is also a truly Asian market nowadays – our deal was fundamentally done in the Asian time zone with the European bid, while important, really being complementary.”