Strong international demand for Adaro's $800 million high-yield bond

PT Adaro, Indonesia's second biggest coal miner, raised $800 million in a blowout 10-year high-yield bond issue at the end of last week. The company priced the deal with a 7.75% yield in the early hours of Friday morning Hong Kong time, having launched the marketing process on October 5.

The transaction was more than seven times subscribed, with orders from 262 accounts amounting to $5.75 billion, according to sources familiar with the transaction. However, as always, it's unclear how many orders and for what size were at the final price. Initial marketing guidance had been set at a yield of 8%.

Nevertheless, the launch clearly came at a propitious time, with international investors pouring cash into high-yield funds. Compared with recent issues by mining companies in the US (Peabody), Australia (Fremont) and Latin America (CSN), Adaro's bonds looked attractive. Investors have also become less fearful of Indonesia's corporate and investment environment. The success of a transaction by a commodity exporter might suggest, too, that money managers are more confident that a global economic recovery is, if not imminent, at least more likely than catastrophe.

Last month, Chinese property developer Country Garden emphatically re-opened the Asian high-yield market with a $300 million (later increased by a further $75 million) five-year bond that pays an 11.75% coupon, yet is rated just one notch lower than Adaro at Ba2/BB.

Credit spreads on non-investment grade (below BBB- and Baa3) bonds have narrowed more than 1,000 basis points so far this year. And despite a widening last week by US and European high-yield indices in the wake of poor results from Bank of America Merrill Lynch, the momentum is still strong. Asia-based analysts are also increasingly arguing that lower default rates and the region's stronger economic recovery means that the liquidity premium normally paid by Asian high-yield companies should be eliminated.

One Hong Kong-based credit analyst said Adaro's deal was "not especially cheap by rating", but that, "the market seems to be pricing for perfection and the search for yield continues, which tends to defy gravity. Momentum for the entire Asian credit universe has recently been very strong, mostly driven by Western accounts".

Asian accounts were only allocated 26% of the paper, while eager US and European investors bought 38% and 35% respectively. Funds, mostly real money portfolio managers, but including a smattering of hedge funds, took 68% of the deal, private banks were given 14% to distribute to their rich yield-hungry clients, commercial banks bought 10% and insurance companies the remaining 8%.

The issue, which is non-callable for the first five years, pays a semi-annual coupon of 7.625%, and was re-offered at 99.141 to yield 7.75% to a maturity date of October 22, 2019. That translated into a spread of 430.7bp over the yield of the 10-year US Treasury benchmark. Adaro's bonds traded as high as 101 in the late afternoon on Friday.

The issuing vehicle is PT Adaro Indonesia, wholly owned by PT Adaro Energy which is acting as guarantor for the senior notes. Adaro Energy is rated Ba1 by Moody's and the equivalent BB+ by Fitch Ratings. The net proceeds will be used for capital expenditure and general corporate purposes.

Credit Suisse, DBS Bank and UBS were the joint bookrunners, while Oversea-Chinese Banking Corporation (OCBC) acted as a lead manager for the Rule 144A, Reg-S issue, which has approval in principle to be listed on the Singapore Exchange.

The deal can claim several bragging rights: it is the first ever 10-year US dollar private sector corporate bond out of Indonesia, as well as the country's largest 10-year dollar corporate, including state-backed deals. It is also the biggest Asian high-yield corporate bond launch since India's Vedanta Resources raised $1.25 billion in June 2008.

The Hong Kong analyst conceded the price was fair on the basis of a near 250bp yield premium over the Indonesia 2019 sovereign issue, which compares with spread pick-up of just 150bp paid by state-owned electricity company PLN in August. His point was that "PLN is a much weaker standalone credit versus Adaro, and only benefits because of its quasi-sovereign status".

Adaro is one of the biggest single-site coal producers in the southern hemisphere and one of the world's largest sub-bituminous coal companies. The company is a low-cost producer with a long concession life and its customers are mainly large utilities with excellent payment records. It exports around 77% of its product.

Separately on Friday, Indonesia's energy and mining ministry said it expects coal output to rise about 9% to 250 million tonnes in 2010 and that there should be sufficient supply for exports to remain above a planned cap of 150 million tonnes a year.

Moody's wrote in a note on October 2, that "Adaro's operating and financial profile has shown consistent improvement in the last few years" helped by improved efficiencies and cost reductions. Adaro's financial metrics are also "strong for the rating level".

But the ratings agency warned about Adaro's lack of diversification given the company's single site and product, as well as potential issues relating to Indonesia's new mining law. And, despite the country's new status as an emerging market darling following the July elections and its resilience to the global economic downturn, Indonesia still holds risks for international investors.