Government guarantee allows SriLankan Airlines to achieve record low yield: IFR
Wednesday, 25 June 2014 01:01
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SINGAPORE (IFR): An explicit Government guarantee has allowed SriLankan Airlines to achieve the lowest yield for a corporate issuer from the country.
The national carrier priced a $ 175 m debut offering of five-year bonds last night at par to yield 5.3%. The Reg S deal finished 32.5bp inside the initial guidance. It was also 2.5bp lower than the reoffer yield on Sri Lankan lender Bank of Ceylon’s 5-year 5.325% bond issued in 2013.
The issue did not have a explicit Government guarantee. However, investors thought the Government’s support for the bonds was implied.
Monday night’s trade was the first time the sovereign has offered such a guarantee to help one of its national enterprises raise funds offshore. The irrevocable Sri Lankan Government backing helped the airline attract demand and garner BB- and B+ ratings from Fitch and S&P, respectively.
Although the yield was a record low for a Sri Lankan corporate issuer, it was relatively generous compared to other deals currently in the market, a factor that enticed investors. The final $ 3 b order book comprised 85 investors, 70 of which were institutions. The rest were private banks, according to a banker involved in the deal.
The bonds offered a 65bp premium over the sovereign paper due 2019, which had a 4.65% yield prior to the announcement. Investors generally require a 50bp premium, which was also reflected in secondary trading. The airline’s bonds jumped one point to yield 5.07%, about 50bp over where the sovereign was traded last morning.
“Due to the illiquidity, given the bond’s small size, secondary level should stay around this fair value for a while,” a trader said.
The carrier will use the proceeds to finance aircraft pre-delivery payments and for working capital. The deal drew anchor orders of about $ 300 m during the roadshow last week. These investors wanted a yield of around 5.5%, according to the banker involved.
Yet the company decided to do a wide syndication to build relationship with global institutional investors. “The company hopes once the relationship is built, it can tap the market without a state guarantee next time around,” the banker said.
However, market participants believe it would be challenging for SriLankan Airlines to issue a bond without the guarantee.
“Airlines go bankrupt all the time. SriLankan Airlines cannot issue a bond without a guarantee,” a Singapore-based trader said.
The airline industry is undergoing a rough patch as tensions in Iraq intensify and cause a jump in oil prices. Global airline shares have plunged in the last two weeks.
SriLankan Airlines recorded three straight years of losses, according to the OC; 2013 saw the deepest loss in three years at $ 170.6 m.
Still, the success of the offering is an example of the extremes that the search for yield is creating in Asian credit markets.
“The biggest risk is that rates [in the United States] go up,” said a portfolio manager in Singapore, indicating that investors have become more focused on the return than on credit quality.
