Lead managers ING, Barclays and Goldman Sachs priced an upsized $300 million high yield bond issue for PT Indosat last night (Tuesday). Together with a bank loan and domestic bond deal, the seven non-call five transaction brings to $973 million the total amount raised by the integrated telecom operator over the last two months.
This figure almost matches the Rp8.266 trillion ($974.2 million) debt level recorded by the company earlier this year, although roughly one third of the proceeds will be used for capex. The debt re-financing package also paves the way for the formal merger of Indosat with its two cellular subsidiaries Satelindo and IM3, which is expected to take place later this month.
ING, the company's merger advisor, has successfully spearheaded the whole debt re-financing package, acting as global co-ordinator of the high yield bond, lead arranger of a Rp3.165 trillion ($377 million) term loan and joint bookrunner of a Rp2.5 trillion ($296 million) domestic bond issue alongside AAA securities.
The high yield bond was priced at par with a coupon of 7.75% to yield 411bp over the interpolated Treasury curve. In year five, the deal is callable at par plus half the coupon (103.375%), in year six at par plus a quarter of the coupon and in year seven at par.
Books closed about three times subscribed over the base deal size of $200 million, allowing the offering to be upsized and pricing successfully concluded at the tight end of the initial indicative range of 7.75% to 8.25%. About 150 accounts are said to have participated, with initial allocations showing a split of roughly 60% to 65% Asia (dominated by Singapore), 20% to 25% Europe and 10% US.
Investors will be hoping that Indosat's secondary spread performance mirrors the renewed momentum evident in Asian credit spreads over the past few days. The company's rival telecom operator, Telkomsel, also represents one of the region's best performing credits over the past month, with its 9.75% April 2007 bond callable in 2005, trading in about 80bp. It is currently yielding about 4.03%.
Observers say there are few direct comparables since Indosat has been able to push further down the maturity curve than the recent spate of five-year deals. Bank Mandiri's 7% April 2008 issue is, for example, trading at roughly 6.2% and PT Medco's 8.75% May 2008 issue at roughly 8.3%.
For Indosat, completion of the debt re-financing will come as a welcome relief given that all debt previously fell due in either 2006 or 2007. The B2/B+ rated group has now significantly termed out its maturity profile as well as achieving a better balance between Rupiah and dollar debt.
The domestic bond deal and loan also both set records as the largest deals of their kind from the Indonesian market.
The domestic bond had a twin tranche structure, comprising Rp1.86 trillion of five-year bonds with a 12.5% coupon and Rp0.64 trillion of seven-year bonds with a 12.87% coupon. The loan has a five-year tenor.
The package as a whole represents a landmark for the Indonesian capital markets since the Asian financial crisis, although the market's willingness to absorb such large chunks of paper can in part be attributed to the halo effect of its major shareholder, Singapore's ST Telemedia.
In a recent equity research report, UBS commented that, "Although not as leveraged as two of this year's major geared recovery plays PLDT (+167% YTD) and TAC (+187%), Indosat's net debt to EV is still a relatively high 35% compared to Telkom's 10%."
But it went on to add, "If the merger succeeds in improving Indosat's returns, then we believe the company could be the next big recovery play."
Because the company is raising funds for capex, gearing will increase over the intermediate term and the rating agencies do not believe the company will become cash flow positive until at least 2006. Moody's also estimates that Indosat's EBITDA/interest coverage ratio will fall from 5.9 times in 2002 to a low of about 3.5 to four times in 2004 and 2005.
It also highlights that there is an element of subordination given that more than 20% of Indosat's gross debt is secured, including the recent term loan, secured by the group's cellular assets.
