Polyus pulls pricing punches to bring $800m
1 February 2017
Russian gold producer, Polyus Gold's decision not to screw pricing to the tightest possible level on its new bond on Tuesday, was correct said its lead managers, after an aggressive pricing from compatriot Rusal sold off in secondary markets.
“Polyus tried to explore the boundaries in terms of yield but then changed their view on this,” said Andrey Solovyev, global head of DCM at VTB Capital in Moscow. “It was the right thing to do. Rusal was quite tight, as pricing was a priority for them.”
Russian borrowers are known for chasing price and size over investor diversification and last week’s market reopener from B1/B+ rated Rusal, the world's second largest aluminium producer, demonstrated that point. The issuer printed a $600m five year note at 5.125% (expected ratings of Ba3/B+), which the leads acknowledged was a particularly tight level. But the deal underperformed on the break and is yet to recover to par.
Indeed, Polyus's own tightly priced bond from October is yet to recover to par. And it looked to be a case of history repeating itself for the Ba1/BB-/BB- company on Tuesday when it revised guidance down to 5.1%-5.25% for the six year note from 5.25%-5.5% initial price thoughts.
But instead of printing at the tight end, the issuer opted to take $800m at the wider end of guidance.
“Our objective with guidance was to offer the issuer the choice between a smaller deal at the tight end, or a larger deal at the wider, but still ambitious and comfortable price,” said Dmitry Gladkov, head of DCM at Renaissance Capital. “That was the rationale.”
This conundrum was quickly answered by drop outs from the order book. Orders of $1.7bn at initial price thoughts, fell to $1.3bn by the guidance stage.
“We had plenty of push-back and the book dropped considerably when we tightened,” said another banker on the trade. “We needed to make a judgement call — do we go for the tighter price, or the bigger size, and provide secondary market liquidity?”
An investor watching the trade said the strategy was a strange one.
“Under normal circumstances the guidance would imply pricing of 5.1%,” he said. “There must have been some big investor who pushed them to pay up.”
“It used to be a good company but now the leverage has gone up,” he said. “It is a better equity story.”
The 5.25% landing point was still deemed tight by analysts and the leads said no new issue concession was paid. Polyus Gold has outstanding 2020s which were quoted at 240bp over mid-swaps and 2022s which were 300bp over on Tuesday.
Russian investors took 57%, Continental Europe 13%, UK 12%, US 9%, and Swiss 9%. Asset managers and funds accounted for 39%, banks and private banks accounted for 61%.