Berau Coal pulled its $450 million five-year bond offering on Wednesday morning, citing adverse market conditions in a company statement. But other factors could have dampened investor appetite for the notes.
Geopolitical risks in Ukraine, Iraq and Gaza have been at the forefront of financial markets, triggering outflows from emerging Asia fixed income. Indonesia was the biggest underperformer in high-yield, with bond prices dropping 1bp at the end of last week, while China real estate averaged around 0.75bp for both BB- and B- rated names, according to credit analysts.
However, with falling thermal coal prices and prevailing scepticism towards Berau’s corporate governance practices after separation from its parent, formerly known as Bumi, investors asked for more time to review the company and its new offering. The request came a few hours after the deal launched on Monday at an initial price guidance of 10.5% area.
“With what’s happening with coal industry, we knew it was going to be a challenging deal from the beginning,” a source away from the deal told FinanceAsia, adding that the terms of the new covenant package were not too investor-friendly. Sources close to the deal declined to comment.
The transaction, which is the company’s first since its split with the Bakrie family, has been in the works since the beginning of the year. Now part of London-listed Asia Resource Minerals, the Indonesian miner embarked on a global roadshow beginning August to drum up interest, notably from yield-hungry investors looking to diversify their China-heavy portfolios.
Other sources away from the 144A/Reg S deal added that investors should pay close attention to corporate governance practices after majority-owner Bumi discovered $201 million of unexplained expenses for 2011 and 2012.
In particular, the accounted-for spending at Berau included $79 million attributed to roads and construction, $42 million to land-related payments and $5 million of goodwill, according to the company’s 2012 annual report. A further $24 million of consulting costs were reclassified to other exceptional costs.
Global coal prices have fallen to their lowest levels in years. Early-August, ANZ predicted that prices will drop 10% more over the next two to three years as China slows spending. The price of thermal coal at Australia’s Newcastle port, which forms the benchmark for Asian coal, fell to $70.35 per tonne in the week ending on June 27, the lowest level since September 2009.
"Because of all these factors investors were demanding for more compensation," said a separate source away from the deal, adding that a return of 11% or above would've been ideal.
Weaker covenants
Berau sought to relax a number of covenants on its outstanding paper expiring in 2017 and create a loser covenant package for the proposed bond, which is callable in year three.
For example, Berau’s existing 2017 notes require the company to maintain two buffer accounts — one for interest payments and one for debt service — that ensure investors get paid on time. The new offering only had the latter account.
Moreover, Berau planned to reduce the threshold to release the notes’ collateral or to amend or terminate the cash-and-accounts-management agreement from 80% of the principal amount to 50.1%. The agreement acts as a cash waterfall that allocates proceeds from coal sales to different reserve accounts, including tax reserve, operating expense, operating reserve, debt service and distribution accounts.
Berau also sought to increase the amount of permitted indebtedness to include up to $100 million for capital expenditure and plus the greater of $50 million or 35% of the book value of inventories plus 35% of the book value of accounts receivable for working capital.
Such terms are not ideal, especially in an environment where the company is facing a more challenging outlook than in the past.
Berau’s existing 2017 notes continue to trade wider than similarly-rated Indonesian peers in the high-yield space, reflecting lingering concerns over corporate governance and cash leakage despite the Bakrie Group’s exit, said Sandra Chow, credit analyst at CreditSights, an independent research provider.
Despite such concerns, Chow was initially confident that the deal could have priced successfully based on the fact that there’s little new supply of Indonesian high-yield at present and Berau is a familiar, albeit imperfect, credit story.
Negative rating
Standard & Poor’s has put Berau Energy’s BB- corporate credit rating on negative because of the lack of clarity on the financial policies of Asia Resource Minerals after Indonesian businessman Samin Tan’s holding in the company increased to 47.5%, compared with 23.8% at end-February.
The rating agency may downgrade Berau by up to two notches even if it can refinance the notes and maintain ample liquidity if future financial policies of the company or its parent weakens its liquidity or credit profile because of higher capital spending or other related-party transactions.
“The BB- corporate credit rating on Berau Energy reflects the Indonesian coal producer’s mineral, customer and single-mine concentration risks, regulatory uncertainty, its aggressive capital structure and thin cash flows,” said Xavier Jean, credit analyst at S&P in a recent note.
The issuer’s rating could also be lowered if refinancing is materially delayed or if the overall group credit profile has deteriorated, added S&P.
Proceeds of Berau’s proposed bond were meant to refinance its existing $450 million 12.5% notes expiring in 2015. Barclays, Citi and Standard Chartered were the joint bookrunners of the transaction.
