Mauritius Commercial Bank has set the yield on its debut bond — a tricky-to-price five year dollar benchmark — without moving from initial guidance.
Initial price talk for the Reg S only senior unsecured bond was put out 7.95% area on Wednesday morning in London.
The yield on the $300m deal was set later in the day, which was in line with the guidance, after books reached “over $500m”. The expected ratings for MCB’s bond are in line with the bank’s Baa3 rating from Moody’s.
But pricing the unusual note was a challenge for some investors.
Lack of like-for-likes
“The problem is there’s nothing outstanding from Mauritius to price it off,” said an EM fund manager in London. “You could use South Africa, but that’s a double-B sovereign and there’s no senior bank paper. And even if there was, the South African banks are much bigger. Their subordinated trades at low 10%-ish.”
The manager said that, based on that route, a Mauritius AT1 would print around 11% and its senior paper would be around 300bp-400bp inside that.
“Or you could say that a new five year South Africa senior would, maybe, come around mid-6%, so for Mauritius it’d be low 7%,” he said. “Either way, I think this stays safely with a 7% handle at pricing.”
A fund manager in the US agreed, and put fair value at around 7.65%.
Citi, Emirates NBD Capital, JP Morgan and SMBC Nikko were joint bookrunners and dealers on MCB’s note. African Export-Import Bank was the joint lead manager.
The leads offered a wide range of suggested comparables to investors using global EM issuers with similar ratings, recent EM FIG supply and African development banks, although they cautioned that none offered like-for-like comparisons.
“In the marketing process we tried to understand from investors what they thought on pricing,” a syndicate manager on the deal said. “We did circulate comparables but they were many and varied, quite esoteric. It allowed people to triangulate pricing to some extent, but this trade is an art, not a science. We were able to identify that the key pricing level and the battleground was around 8%.”
'Classic EM'
The fund manager added that MCB was an “interesting test” for the market.
“It’s a test of investors’ willingness to engage precisely because it’s not a super easy name to price,” he said. “The market has come back a bit and leads would be able to sell a ton of GCC bank paper right now, as those have big established curves and with oil fairly stable it’s a hiding place for investors. But this is different — it’s true price discovery and we have no idea what the local bid will be to support it. There’s also no US bid because it’s Reg S.”
But the manager said MCB’s bond may attract investors for several reasons.
“Everyone’s a bit wary of subordinated risk right now,” he said. “And here’s a country champion offering high 7%. That will look like a good option to some people, especially when you consider that Middle East AT1 is trading at high 6% to mid-7%.”
MCB conducted a non-deal roadshow last year in addition to investor meetings last week, according to the fund manager.
A syndicate banker on the deal called it “classic EM”.
“This has had a long gestation and we’ve done a lot of investor work,” he said. “Not all investors are exposed to this part of the world, and the investor work went quite well. The order book is decent.”
The bond will be issued from MCB’s $3bn global medium term note programme. It is expected to be printed on Wednesday afternoon.
“This is a good sign for the primary market, but this is investment grade,” said the syndicate manager on the deal. “Investors are interested in investment grade if it’s cheap for them, even if it has a story. The lower rated issuers are still challenging. This is a nice combination of an investment grade rating and a juicy yield.”