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Indonesian power company Cikarang Listrindo priced a $500 million seven-year bond amid resurgent demand on early Tuesday morning, re-opening the market for a growing pipeline of high-yield companies that are lining up to tap the market.
Cikarang Listrindo provides energy to industrial and residential estates in Indonesia, and it is a bell-weather high-yield borrower that has an established following among investors. The deal was the first Indonesian corporate high-yield bond this year and rode on the positive momentum generated after Fitch and Moody’s upgraded the sovereign to investment-grade status.
The initial guidance for the bonds, which are callable after the fourth year, was at the area of 7.5%. This was revised to the 7.25% area and once again to a final guidance of 6.95% to 7.05%, with the bonds pricing at the tight end. Barclays Capital and Credit Suisse were joint bookrunners.
The deal gathered a $4.3 billion order book from more than 250 accounts. About half that number of investors took part when Cikarang issued its debut bond back in 2010, so its latest deal helped widen its investor base. In secondary trading, the bonds went on to trade higher at 100.75/101 on Tuesday morning
The warm reception from investors augers well for high-yield issuers such as precision hard-drive maker MMI Holdings, which is meeting investors, and Indian company Core Education & Technologies, which was marketing its deal yesterday. Vincent Lo’s Shui On Land had also priced its $400 million high-yield bond last week, but that deal was distributed mainly to the private banks, whereas Cikarang was heavily placed with fund managers.
Together with the new bond, the company had also launched a tender offer and consent solicitation for its outstanding 9.25% senior notes due 2015. The company sought to loosen a number of covenants. For instance, the Cikarang 2015 bonds could be amortised, whereas the new bonds have a bullet payment structure. The new bonds also allow Cikarang to invest up to $80 million before its IPO in an unrestricted subsidiary that is in a similar business.
Some fund managers had raised objections to the loosening of covenants, suggesting that it is too easy for Asian companies to make such changes. “We feel that the issuer should honour the terms of the original covenant. It’s a tough process as you only need a 51% majority to make covenant changes, so while you might disagree with changes in-principle, you could get outvoted by the majority and lose your consent fee,” said one Hong Kong-based investor.
“We were proposing to raise the threshold for covenant changes from 51% to 75% in the new bonds, but the issuer wasn’t interested. From Cikarang’s point of view, they probably were thinking, why them and why now? But from an investor’s point of view, it would have shown goodwill on their part and given investors’ assurance that covenants would not be changed down the road,” he added.
Bankers on the deal argue, though, that obtaining approval from a majority of investors to change covenants has been the “standard practice” and that Cikarang’s new covenants reflected the change in its status since the last time it tapped the market.
“Back in 2010, Cikarang was a debut issuer and market conditions were different — most of the issuance prior to that was sovereign deals and Cikarang was the first high-yield bond in a while,” said the banker. “The covenants were onerous —investors had a list of requests and the company agreed to them back then but things have since changed,” said the banker.
In the end, the consent solicitation and bond tender was agreed on by an overwhelming percentage of investors. As of February 10, 2012 — the early consent deadline — bondholders of 93.33% of the principal amount had agreed to the covenant changes and to tender their bonds. The early consent fee was three points and the tender offer was 107.75.
The new bonds offered a more liquid benchmark for investors and, according to the banker, an “overwhelming number” of the holders in the new bonds were those that had tendered their bonds.
The deal was heavily placed with fund managers, which were allocated 67%. Private banks and retail took 18%, banks 8%, insurers and pension funds 4%, and others 3%. Asian investors were allocated 38%, US investors 35% and European investors 27%.
Cikarang has the option to redeem the bonds at 103.475 on or after February 21, 2016, at 101.7375 on or after February 21, 2017 and at par on or after February 21, 2018. The coupon was fixed at 6.95% and the notes priced at par. The bonds mature on February 21, 2019.
