Bumi Resources CB raises $375 million

Coal miner PT Bumi Resources late Wednesday raised $375 million from Indonesia’s first convertible bond (CB) in 2009, which met with significant interest. The strong demand allowed the Indonesian coal miner to nearly double the size of the bond, from an initial offering of $200 million.
 
The five-year bonds were marketed with a coupon between 9% and 9.5%. It was fixed in the middle, at 9.25%, which is the largest coupon for an Asian CB so far this year. The CB also stands out because the coupon is payable on a monthly basis, rather than in the standard semi-annual installments. Since the bonds are both issued and redeemed at par, the coupon is also equal to the yield.

The bonds can be put back to the issuer after two years and the issuer can call the bonds after three years if the shares close at or above 130% of the conversion price for 25 consecutive days. 
 
Bolted on to the deal is an equity swap with Credit Suisse, which was also the sole bookrunner and underwriter, to facilitate stock borrowing for the buyers of the CB. This makes the deal similar to CBs issued last year by companies such as China High Speed Transmission and Country Garden Holdings. The company will use $115 million of the proceeds to buy back shares in the market. These shares will then be swapped with Credit Suisse, which will make a second swap with investors to enable them to establish short positions.
 
There are usually two effects of attaching an equity swap to a CB:  it helps persuade investors to accept a slightly higher conversion premium and it also helps boost the share price (thanks to the buyback in the open market). The latter effect was certainly realised, since Bumi’s share price was up 12.8% at yesterday’s close. The conversion premium was also respectable at 30%, which was equal to the bottom of a range that went up to 35%. The most recent Asian CB, the $300 million deal by Daewoo International at the end of June, also achieved a 30% conversion premium.
 
Alongside the equity swap was a call option with Credit Suisse. For this part of the deal, Bumi entered into two call options – it bought from the underwriter an option to buy shares at a 30% premium and sold an option to sell the shares at a 75% premium. The net effect of these derivative transcations is that it increases the conversion premium. Although similar call options have been used before on CBs for Asian companies listed in the US, this is the first time it has been applied to a pure Asian deal.

Another Asia first is that the conversion premium will not be set over the last market price before the deal, but rather it will be based on the average of the volume-weighted average price over the three days following the deal.

The credit spread was assumed at 1,000bp above Libor. This gave a bond floor of 95% and an implied volatility of around 20%, which compared to a 10-day historical volatility of 71% and a 30-day historical volatility of 81%, according to Bloomberg.

While many Asian stocks have already recovered strongly in recent months, Bumi’s share price is still very much in the doldrums compared to last summer. Trading at around Rp2,400 a share, the stock has more than tripled in value since the beginning of March, but it is still well below the Rp6,750 price that it fetched at the end of July last year, Rps6750. This does suggest, however, that there could still be plenty of potential upside, which makes the CB story all the more compelling.

With the synthetic stock borrow facility, it should come as no surprise that many of the investors were hedge funds. But one source pointed out that among the 50 accounts in the book, there was also a good showing of long-only investors. And the bond proved popular in the secondary market yesterday, with different sources all saying that the bond traded up to between 102 and 104.

Despite the high coupon, the deal is something of a triumph for Bumi, which late last year looked to be in dire straits. The collapse in commodity prices caused its share price to plummet, exacerbating its debt problems because shares being used to guarantee $1.2 billion worth of debt no longer provided sufficient cover. Investors were circling the company, looking to see if they could pick up some of Bumi's assets on the cheap.

But the company's rising share price, combined with the high levels of demand for Wednesday's CB, suggests that if investor sentiment is anything to go by, the worst is probably over for Bumi.