A $250 million 144a bond offering combined with a consent solicitation and exchange offering was completed in New York last night (Thursday) to considerable acclaim. With an order book of $1.2 billion and roll call of 120 investors, the new seven put five deal led by Credit Suisse First Boston and UBS Warburg can be considered nothing short of a resounding success.
This is particularly the case when compared to the E&P company's previous deal priced almost a year ago to the day, which attracted just 18 investors and had to be scaled back from $150 million to $100 million. Representing the first fixed rate dollar bond by an Indonesian corporate since the Asian crisis, the five-year deal has also been the subject of a concurrent consent solicitation and exchange offering led by UBS Warburg.
Full details will not be released until today, although observers say the process has closed with an almost unprecedented acceptance rate of 99.9%. And given that most investors are said to have opted to exchange their bonds, this means the new deal size will be lifted above $300 million, potentially making it Indonesia's largest and most liquid outstanding benchmark.
The success of the new deal by has been attributed to a confluence of fortuitous events. Most importantly, the global credit demand fuelled by the recent weakening bias of the US Federal Reserve has been particularly evident in the high yield markets. In Asia, the Philippines' clouded credit outlook has also acted in Indonesia's favour. Investors have clearly been chasing upwards rating momentum, which culminated last week in a sovereign upgrade from CCC+ to B- by Standard & Poor's.
Secondly and once again in contrast to the Philippines, Indonesian paper has performed well over the last year in tandem with efforts by the country's major credits to re-establish some level of trust with investors. PT Medco's 'history' meant that it has had to work harder than most to do so and as a result the original deal underperformed its peers, never really trading above 102%.
The new one has priced inside the old, but most believe it still offers plenty of upside. Pricing of the May 2010 transaction, puttable in May 2008, was completed at 99.011% on a coupon of 8.75% to yield 9% or 646bp over Treasuries. The original deal, which has a March 2007 maturity, was yielding 9.3% at the time of pricing. Fees are 1.70%.
However, while the B+ rated deal has been able to claw back some lost ground, it still lags both the quasi-sovereign curve represented by the lower B-/B3 rated Mandiri and corporate curve represented by B/B3 rated PT Indofood. For example, Mandiri's April 2008 bond is currently trading to yield 6.52% or 405bp over Treasuries, while Indofood's June 2007 bond is at 7.96% or 549bp over Treasuries.
In this context, it is hardly surprising the deal was priced at the tight end of guidance and attracted such a strong order book. Distribution figures show that 46% of demand came from Asia, 30% from the US and 24% from Europe. In complete contrast to every other deal from the Republic to date, Indonesia represented just 11% of overall demand and Singapore, where offshore money is often parked, a further 24%.
By investor type, the book broke down: 51% asset managers, 24% private banks, 14% banks, 8% insurance, 3% corporates.
For US investors, Medco is said to offer little relative value to single-B rated domestic comparables, most of which trade with a 10.5% plus coupon. What it does offer is diversification and upside potential. As one specialist concludes, "Putting in a $5 million to $10 million order is not that risky in the context of investors' huge holdings in Latin America. There's a desire to diversify and investors are comforted by the domestic backstop bid, which will support secondary market trading and allow for an easy exit if necessary."
Medco CFO Sugiharto says he is exceptionally pleased with the response to both the bond and exchange offering. "It reflects the credibility of the management and also shows that investors believe the general macro situation in Indonesia is moving in the right direction," he says.
The consent solicitation and exchange was initiated with the intention of easing restrictive covenants and bringing them in line with the standards of high yield transactions in the US. In particular, the group wanted to lift restrictions on building up subsidiary indebtedness. This has been changed from a $15 million limit to 20% of consolidated borrowings.
Analysts say that Medco has a relatively underleveraged balance sheet and adequate liquidity cushion to support company growth. Sugiharto says that the company does not want to increase debt to capitalization beyond the current level of approximately 40% (post deal). Proceeds will be used for acquisitions.
