September 28, 2018 / 7:52 AM / 8 months ago

Papua New Guinea raises $500 million in debut sovereign bond

HONG KONG/SYDNEY, Sept 28 (Reuters) - Papua New Guinea raised $500 million in its debut sovereign dollar bond on Friday, successfully tapping the international market two years after a botched attempt and marking a rare bright spot in emerging markets.

The island nation sold 10-year bonds at a yield of 8.375 percent after drawing over $3.3 billion in orders, most of which came from the United States, according to a term sheet seen by Reuters.

The notes were rated a sub-investment grade B by Standard and Poor’s and B2 negative by Moody’s.

PNG, which is hosting Asia-Pacific Economic Cooperation (APEC) meetings in November, has one of the larger economies in the Pacific Islands region, backed by mining and large oil and gas reserves.

But the country’s finances have come under pressure after revenue from resource projects and tax receipts failed to meet forecasts.

The country was also hit by a devastating earthquake in February, killing more than 100 people and disrupting one of the country’s main money-spinners, the ExxonMobil-led gas operations.

PNG sought to drum up investor interest in a sovereign bond two years ago but it never got off the ground, but appetite for bonds issued by resource-rich countries such as Mongolia and Nigeria convinced it to try again.

Nigeria sold $3 billion in 10-year bonds at a yield of 6.50 percent in November.

A banker on the PNG deal said the transaction was not easy given the broader sell-off in emerging markets driven by rising U.S. interest rates.

However, the banker said, emerging market fund managers in London and the United States were keen on the PNG bond as frontier markets have held up better than some larger emerging markets such Turkey, Argentina and Indonesia.

“Initially the investors were a bit sceptical, questioning the timing,” the banker said.

PNG has total foreign debt of $2.5 billion, with almost $590 million owed to China, making it China’s biggest debtor among Pacific islands.

“They’ve got debts to pay back and they are struggling fiscally to pay wages and you do want to do something to stimulate the economy,” said Australian National University researcher Rohan Fox.

Fox said, however, that PNG’s kina currency had been kept artificially high via a trading band, which posed a risk to the government should it convert some of the U.S. dollar bond.

“When you transfer into kina you want the exchange rate to be lower so you actually get more kina for your loan,” said Fox. “Then you’ve got upward risk rather than downward risk in terms of the exchange rate when you are paying it back.”

PNG had originally been offering both 5-year and 10-year notes but found that investors were more interested in the longer-dated paper because some of the country’s assets, such as liquefied natural gas (LNG) projects, are long-term, said bankers on the deal.

PNG plans to use the proceeds to refinance existing public debt as well as funding infrastructure and development projects. It will also use some of the proceeds for the APEC summit.

Citigroup and Credit Suisse were joint lead managers and bookrunners for the deal. (Reporting by Julia Fioretti and Jonathan Barrett; editing by Eric Meijer)

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