Jackie Horne | Finance Asia | 17 June 2016
The Independent State of Papua New Guinea (PNG) is set to embark on international roadshows next week for what it hopes will be its debut international bond deal.
The B2/B+ rated nation has hired ANZ, Bank of China, JP Morgan and Societe Generale for a dollar-denominated transaction.
Central bank governor Loi Bakani and Department of Treasury secretary Dairi Vele will lead presentations in London on June 21, followed by Boston on June 22 and New York on June 23.
The prospective deal comes at a critical time for the country, which is running short of US dollars and wants to raise funds to manage government finances, which are under pressure as a result of low oil prices.
PNG will be hoping it is third time lucky given it has made at least two active attempts to raise dollar bonds over the past decade-and-a-half, both of which failed. Has it got the ingredients right to serve up a successful deal this time round?
One new addition to the mix is the presence of Bank of China on the syndicate.
Its inclusion underscores a new stage in the internationalisation of Chinese banks as they become more active in the global capital markets. Historically, they have only been able to win mandates from their own credits before, with the exception of ICBC, which was joint global co-ordinator on a deal for the Republic of Angola due to oil-related ties between the two countries.
Bank of China’s inclusion also reflects the greater role Chinese companies are playing in PNG too. Over the past few years, Chinese companies have started to build up their presence in the country, particularly in the mining sector; something that was not the case when the sovereign last tried to access the market in 2013.
That year state-owned Guangdong Rising Assets Management purchased a $3.6 billion copper project from Glencore (PanAust), which it is still seeking approval for, while Zijin Mining purchased Barrick Gold’s Porgera gold mine in 2015. China Metallurgical Group also has a $2.1 billion nickel-cobalt project.
As such, Chinese investors may well provide some form of backstop for the deal, especially given they have a reputation for being far less bothered about political risk than the emerging and frontier market investors PNG will still need to win over.
In PNG’s case, that may be just as well since political risk will be one of international investors’ chief considerations.
Even by Asian standards, PNG has had a colourful time trying to launch itself into the international capital markets.
Its first attempt occurred in early 1999 when the then B1/B+ rated sovereign awarded JP Morgan and UBS a mandate to bring a $250 million five-year bond.
But its plans rapidly fell apart when the leads discovered proceeds might end up being used for re-payment of mercenaries. The previous government had hired one such group, Sandline International, to deal with a crisis in Bougainville where protests relating to environmental damage by a Rio Tinto copper project had provoked an attempt at secession.
London-based Sandline had a legally binding contract with the government and had been awarded costs of $18 million by an international tribunal after the government failed to pay its fees in full.
PNG similarly failed in its efforts to get a bond deal off the ground in 2013 after mandating Barclays, BNP Paribas and JP Morgan.
A second key variable, which may act in its favour this time round, is the completion of a $19 billion liquefied natural gas (LNG) plant run by ExxonMobil, which is now operational and has the potential to help transform the country over the longer-term. Revenues from the project, which account for 118% of GDP, had been earmarked to lift the country to a new stage of development but have been hit by falling oil prices.
As a result, the government has had to rein in spending by 17% so far this year. Standard & Poor’s believes it will be successful and achieve a budget deficit of 4.6% compared to 5.6% in 2015.
In terms of pricing a new bond deal, there are a number of Asian nations with ratings close to PNG including Sri Lanka with its B+/B1 rating, Pakistan on B3/B-/B- and Mongolia on B2/B.
Sri Lanka and Pakistan both have 2019 bonds outstanding, which yield 5.1% to 5.2%. However, it seems far more likely that Mongolia will provide a better comp given it is also struggling with an economy that has been hit by declining commodity prices.
Its 2021 bonds are currently trading at the 10.2% level and it seems highly unlikely PNG will be able to better this given Mongolia already has an established track record.
PNG’s credit ratings are also heading in the wrong direction. Earlier this year it was downgraded by Moody’s from B1 to B2 and is now on stable outlook.
However, its B+ rating has been on negative outlook with S&P since 2007.
In its most recent ratings release, S&P said low global energy prices are “weighing on the economy, export receipts and government revenues”. It added that this is coinciding with large increases in external and fiscal imbalances but noted the government is responding “forcibly” to deal with them.
The agency also highlighted how the country ranks a lowly 155 out of 188 on the UN’s Human Development Index and flagged a high level of urban crime: something international bankers who have visited the country are very familiar with given the presence of armed guards as escorts every time they leave their hotel in Port Moresby.