* Sovereign scraps debut Eurobond plans for private placement
* Observers attack deal structure and pricing
* Lead manager defends trade as tailored to issuer needs
By Davide Scigliuzzo
LONDON, March 1 (IFR) - Rarely can a new bond issue have evinced such extreme criticism as Tanzania’s entry in the international capital markets last Tuesday. The cheaply priced US$600m seven-year private placement was described as a “disaster” by one banker.
And certainly the immediate secondary market performance looked terrible. The bonds jumped 2.75 points on their first day of trading - a 66bp compression in spread terms. That works out at a cost to the government of US$4m a year in coupon payments, assuming that the bonds could have priced at the tighter level.
For one of the poorest countries in the world, with GDP-per-capita of US$532 as of 2011, according to the World Bank, that’s a considerable amount of money to be giving to investors. And the pain could get even worse.
“I still see a lot of upside,” said one investor, who reckoned the notes could quickly rally to a cash price of 107.
The deal, which was led by Standard Bank, perplexed the financial community from the moment news emerged about it nearly two weeks ago, especially as Tanzania has an unofficial mandate with Citigroup for a public Eurobond.
Although that deal remains a long way off as Tanzania does not have a credit rating, market participants were surprised the country was going ahead with a private placement as its debut international bond.
“To consider a private placement when they were talking about a Eurobond is not great investor relations,” said an analyst who covers the region.
A syndicate official at Standard who worked on the trade said, however, that the private placement was a sensible alternative to a fully fledged Eurobond - given the absence of a rating.
“They wanted the financing now for use in infrastructure projects. In order to achieve their aim of raising a large sum with intermediate tenor, this was the most effective and cost-efficient method,” he said.
Perhaps. But critics also rounded on the deal’s structure, which reduced its appeal to many investors - and put pricing power in the hands of the few buyers willing (or able) to take part.
Not only was it structured as a floating-rate amortising note (of interest to a small sub-set of investors), it came in Reg S-only format (thus disqualifying the key onshore US investor base that typically underpins such trades) and was both unrated and unlisted.
Remaining investors exacted a hefty compensation for the bonds’ structural peculiarities and the likely lack of liquidity. “Investors had all the leverage in the world,” said a rival origination official. “They have paid 200bp more than they would have with a Eurobond.”
Again, though, the Standard syndicate official insisted that the structure was a response to what the client wanted. “The amortisation structure is part of a prudent management of the repayment schedule and is something developing countries often prefer to have in place,” he said.
Unofficial price talk on the seven-year note, which has an average life of five years, was revealed at 600bp over Libor on Monday, before official guidance was announced the following day at Libor plus low 600s. Eventually, the deal raised US$600m, the maximum amount Tanzania was allowed to borrow in the international markets under its IMF programme, at a final price of Libor plus 600bp.
“This was not a plain vanilla transaction, and we received unanimous feedback from investors that it would require a six-handle spread to get done,” said the Standard official.
The pricing resulted in a triple-digit premium to other sub-Saharan African sovereigns, including Angola, which itself printed a cheap and illiquid bond last year. That was a repackaged loan, however. The Tanzania deal is not.
Angola’s 7% 2019 bond, rated Ba3 from Moody’s and BB- from Standard & Poor’s, was trading at 415bp over mid-swaps before Tanzania’s deal was finalised.
Against other African sovereigns, the premium paid was even higher. Zambia, for example, which is rated B+/B+, was trading at 340bp over mid-swaps on its 5.375% 2022 Eurobond on Monday. Ghana, which is rated B/B+, was trading at 395bp on its 8.50% 2017 Eurobond.
And these were prevailing levels after Tanzania’s price talk had pushed their curves significantly wider. Ghana’s bond, for example, had dropped from 116.5 to 115 in price - equivalent to around 40bp - after price talk for Tanzania’s deal was revealed.
Another banker said buy-and-hold investors who took part would be “rubbing their hands with glee,” while for other stakeholders it was a “lose-lose situation.”
The notes have a final due date in 2020. The principal amortises in nine semi-annual instalments starting on the notes’ third anniversary.
Reporting by Davide Scigliuzzo; Editing by Sudip Roy, Matthew Davies and Julian Baker