UBS completed a slightly scaled back $115 million three-year deal for Hong Kong based conglomerate First Pacific yesterday (Wednesday). The Reg S transaction in the name of CAB Holdings was priced at 99.35% on a coupon of 8.25% and yield of 8.5% to give a spread of 649bp over Treasuries. On a Libor basis, the deal came out at 608bp, representing a roughly 150bp premium to First Pac's operating company Indofood, whose 10.375% June 2007 bond was trading at 452bp at the time of pricing.
Both companies share the same single B rating from Standard & Poor's and although the two transactions are completely different animals, most investors would have looked at Indofood as the main benchmark. Therefore as Indofood widened roughly 50bp on Asia's trading day, pricing of First Pac's new issue was also pushed out from price talk around the 8% mark.
Initially, the company had targeted proceeds of $150 million, which would have enabled it to re-finance a $100 million loan falling due at the end of the year and fund $14 million in capex commitments to Indian cellular operator Escotel. As it is, First Pac will be able to re-pay the ING loan and fund the bond's first and last coupon payments, which are to be placed in an escrow account.
Given First Pac's negative net cashflow, it would have been very difficult for the company to re-finance the loan without the high yield bond. Dividend payments from Indofood do not currently cover the company's operating expenses, let alone debt re-payments. And given that it has either been unable or unwilling to liquidate assets, a high yield bond offered one of the few viable options.
But in order to get investors' backing, the deal needed to be collateralized by First Pac's 51.6% stake in Indofood. Based on a share price of Rp800 and exchange rate of Rp850, the stake is worth about $415 million, equating to a coverage ratio of 3.6 times.
If, as a result of a falling stock market and depreciating Rupiah, this level falls below two times, First Pac has to top the structure up with cash. If it falls below 1.8 times, the company must either immediately re-finance the whole bond, or let the trustee liquidate the stake in the open market.
The collateralized structure of the deal has perturbed a number of analysts. On the one hand, there are those who believe the Salims now risk losing control of their crown jewel. On the other, there are those who argue that investors would be stupid to trust in any kind of covenant protection offered by an Indonesian borrower.
As Barclays comments in a research report published yesterday, "One thing the Indonesian crisis should have taught bond investors is that you can notionally have pledges over shares or assets, but in the end it is the controlling management in Indonesia who actually decides what happens as trustees of bond issues are frequently too slow or unable to act in the interest of bondholders. PWC, who were First Pac's auditors until December 2002, resigned as a result of not having responsibility for the audit of the Indonesian business, with Ernst & Young or its affiliates now auditing both First Pac and Indofood."
However, there is additional bondholder protection in the new deal through the inclusion of a subordinated guarantee to First Pac in the event of the stake being liquidated. This means that were judicial proceedings to become bogged down in Indonesia, bondholders would have recourse to go straight after First Pac through the Hong Kong courts.
And the company has argued that the high yield bond will improve its credit profile since the ING loan was secured by its stake in both PLDT and Infofood. Were the covenants to be triggered, management also believe they would be able to secure additional funding using First Pac's 15.9% stake in PLDT as collateral.
Books for the deal are said to have closed one-and-a-half times covered. By geography, Indonesia accounted for 35%, Singapore 28%, Hong Kong 17%, the Philippines 8% and other 12%.
By investor type, offshore private banking demand from Indonesia was unsurprisingly the main driver of the deal. Private banks were allocated 41% of the deal, followed by banks 40%, asset managers 16% and corporates 3%.
