Joint leads Goldman Sachs and JPMorgan have been mandated to sell a $300 million five-year senior secured bond deal for Indonesian Coal producer, PT Adaro. The Reg S/144A deal will kick off roadshows in Singapore on Thursday (October 24) before moving on to Hong Kong on the 25th, London on the 28th and Boston and New York on the 29th and 30th.
The deal will be guaranteed by Adaro and PT International Bulk Terminal (IBT). The deal, along with a $250 million loan is a refinancing package of an existing bank deal and will be used to pay down interest and the principle of a mezzanine facility.
The structure of the deal is unusual, in that as a senior secured facility it is rated alongside that of the new bank facility. Generally, the bond would be subordinate to a bank facility.
The deal also has a rigid cash waterfall structure. Effectively, all revenues will be captured in a cash trap account in an offshore vehicle incorporated in Singapore. A portion of that cash is sent back to the company to pay operating expenses and taxes.
The balance is then allocated toward an interest payment account for the loan facility and the bond, which is paid quarterly. Once that has been paid a debt service coverage test is undertaken and if that test is met then the interest is paid on the mezzanine. Following the interest payment on the mezzanine, all residual cash is split evenly toward the loan and bond and the mezzanine.
In effect all excess cash generated by the company is allocated to pay down debt.
Adaro produces an environmentally friendlier coal, labeled Enviro-coal (a low sulphur generating, low polluting coal), which is in high demand because of requirements to reduce emissions, particularly within regions that have established strict emission targets.
According to S&P's ratings report, "Adaro's production cost of steaming coal is one of the lowest in the world because of its open pit mining and low strip ratio. The company has steadily increased production each year to become the largest single-mine coal producer in Indonesia with production of 24 million tons of sub-bituminous coal in 2004."
It adds, " Its main brand, 'Envirocoal', has uniquely ultralow ash and sulfur content, and therefore has relatively more environmentally friendly benefits. Its coal reserves should last about 14 years. The company has long-term supply contracts with its diverse customers, which provide a certain degree of stability to its cash flow in the medium term. Foreign currency risk is manageable as its U.S. dollar debt is naturally hedged by its U.S. dollar revenue."
Ironically, Adaro has a shared history with paper and pulp tycoon Sukanto Tanoto, the owner of Sateri International, which pulled a similar high yield bond deal just over a week ago. In October 1997 Tanoto was granted a one-year $100 million bridging loan facility from Deutsche Bank, and via his Singapore-based holding company Beckett Private guaranteed a share pledge in Adaro and IBT as collateral.
Beckkett defaulted on the loan a year later and in 2002 Deutsche Bank foreclosed and subsequently sold the shares pledged by Beckkett to PT Dianlia Setyamukti for $44.2 million. Beckett has since filed a motion against Deutsche Bank and Dianlia in the Singapore courts for the return of the shares or adequate compensation, disputing the sale and further claiming that it was executed below market value.
Some specialists say the litigation is unlikely to affect Adaro's legal liability towards its creditors. They add that Deutsche Bank was legally entitled to sell off the assets to recoup its losses and that the claimant has already passed its three-year legal limit to file motions.
Others say there is no three-year legal limit and point out that a trial date has already been set for next February.
