Matahari bond exchange close to 90% accepted

Matahari International BV said yesterday that its proposed bond exchange offer and consent solicitation had received combined acceptances representing 89.39% of its outstanding bonds due to mature in October. The offer, which aside from an exchange of old bonds for new also includes a consent fee in return for the waiver of a fixed charge covenant, needed a two-thirds acceptance level to go ahead.

The deal, jointly lead managed by Citi and UBS, is a welcome fillip to Asia's nascent debt restructuring industry, which has been long on rhetoric, marketing and cash spent on building up human resources, but rather short on actual transactions and fees to justify all that outlay. Another Indonesian company, tire maker PT Gajah Tungall, completed a $420 million bond exchange earlier this month. 

The new notes, like the old ones, will be issued by Matahari BV and will be guaranteed by PT Matahari Putra Prima TBK. Matahari Putra Prima is a leading retailer in Indonesia. It operates department stores, hypermarkets, supermarkets and family entertainment outlets in over 50 cities in the country. The Lippo group controls about 57% of Matahari's equity interest.

The two elements of the successful proposal contain a two percentage point upfront fee in the form of new 2012 bonds for holders who accepted the exchange offer by July 24, and a cash payment of 0.5% to holders who, by the same date, declined the exchange offer but nevertheless agreed to waive a covenant which restricted the company's borrowing.

For instance, an investor who owns $1 million of the old 9.5% senior notes and accepted the exchange offer will receive $1.02 million of the new bonds, which will have a minimum yield of 11.75%. The final terms, including the issue size, will be announced after a bondholders' meeting due to be held on August 3, and the settlement date for the new bond issue is expected to be August 10.

By the early deadline, a total of $79.6 million, or 69.24%, of the principal amount of the notes had been submitted for the exchange offer out of $114.97 million outstanding. The original issue size was $150 million, but the company has already swept up loose notes in the secondary market in recent weeks.

According to sources familiar with the transaction, there has been substantial demand for additional bonds which will be issued on top of those exchanged, but the amount will be capped to ensure a healthy secondary market.

Nevertheless, part of the company's primarily Asian investor base clearly decided not to participate in the exchange. The procrastinators and the disorganised still have until Thursday to accept, but having missed the early deadline unfortunately they won't get the two percentage point incentive fee.

The second part of the proposal -- the 0.5% waiver fee -- presumably appealed to investors who were happy to hold on to the 2009 bonds until they redeem and receive par and a final interest payment, but were not keen to maintain their exposure to Matahari. The old bonds contain a fixed charge (income divided by fixed interest debt payments) limit of three times, while the covenant attached to the new bonds will allow a cover ratio of just two times the fixed interest payment level.

Holders representing $23.17 million, or 20.15%, of the outstanding principal amount accepted the new covenant.  

The new Reg-S notes are rated B1 by Moody's and the equivalent B+ by Standard and Poor's, according to an earlier offering circular.

Investor confidence seems to be backed by the credit rating agencies. On July 13, Moody's assigned its B1 rating to Matahari, noting that "a successful completion of [the] exchange offer would materially enhance the company's liquidity and financial flexibility, thereby supporting its planned capex programme of around Rp1 trillion ($100.35 million) in 2009".

But it warned that Matahari's strengths, including its leading position and long operating track record in Indonesia's department store business, "are offset by the company's aggressive expansion plan and resulting negative free cash flow generation in the last few years, which is likely to continue over the medium term".

On the other hand, Moody's pointed out that Matahari's debt service ratios are in line with its similarly-rated global retail peers, with adjusted debt-to-Ebitda expected to stay around 5.0-5.5 times in 2009-2010. And although "its free cash flow metrics are thin for the rating category", given the aggressive capex programme it is implementing to expand its store network, in mitigation Moody's noted the "highly discretionary nature" of that same capex.