Presentations began in Jakarta on Monday for a five-year Reg S deal led by Credit Suisse First Boston. After roadshowing through Asia this week and Europe next week, the deal is scheduled to price the week beginning March 4.
If successful, the deal - to be issued in the name of MEI Euro Finance Ltd - will set an important new benchmark for corporate Indonesia. There is currently just one outstanding fixed rate bond from the corporate sector - a $65.9 million 8.375% June 2006 issue for PT Sampoerna; one issue from the banking sector - a $145 million 7.625% January 2007 issue for Bank Negara Indonesia - and one sovereign issue - a $400 million 7.75% August 2006 transaction.
Indeed, since the financial crisis, Indonesian entities have been a rare sighting in the offshore markets. Asia Pulp and Paper (APP) completed three main transactions prior to its collapse, of which a $400 million high yield deal for its China operations was the most notable. Other than this, there have been two small syndicated facilities for First Pacific-controlled Indofoods and a $100 million FRN for Bank Mandiri via HSBC last December.
As a result, pricing benchmarks for the new deal are few and far between. With a B+ rating and stable outlook from Standard & Poor's, the company stands an impressive four notches higher than the B3/CCC rated sovereign, whose highly illiquid issue is currently bid at 8.6%, a spread of 441bp over Treasuries. Sampoerna, which also breaks the sovereign ceiling with a B3/B- rating, is currently bid at 10.1%.
Bankers believe that Medco's deal is likely to fall somewhere between the two, with most predicting a yield just above the 9% mark. Its rarity value, in combination with strong credit ratios and a healthy yield, are expected to play well with investors. Unlike Sampoerna, which derives 100% of revenue in rupiah, Medco is also a pure dollar earner and has witnessed consistent revenue growth throughout the whole of the financial crisis.
Like the rest of corporate Indonesia, however, it has also enjoyed a colourful history and at the onset of the Asian crisis became trapped between a short-term debt load and banking sector, which was unwilling to re-finance it. In particular, it was tripped up by Rp1.8 trillion ($171 million) in commercial paper issued by Peregrine and guaranteed by the state-owned insurance company Jasindo. Company founder Arifin Panigoro, who is also a leading politician once associated with Suharto and latterly Megawati, was subsequently accused of corruption in relation to the controversial guarantee, but later cleared.
Largely as a result of the CP issue, Medco had a gearing of 65% by December 1998, of which 80% constituted short-term debt. One year later, however, it had completed a debt restructuring which reduced its total debt by 65% and saw CSFB become more intimately involved. Having amassed large holdings via its distressed debt team, the investment bank then became a shareholder.
It started to sell-down this shareholding last autumn when Thailand's PTTE&P (PTT Exploration & Production) acquired a 40% stake in New Links Energy, a company which owns 85% of PT Medco Energi. New Links was originally owned by CSFB and the Panigoro family, with the former now holding a 19.9% stake and the latter a 40.1% stake. The remaining 15% of shares not held by New Links are split between a 6.2% public float, 4.7% in Treasury shares and 4.1% other shareholders.
Conscious of its recent history, Medco is not surprisingly keen to lengthen the maturity profile of any new debt it takes on. Since 1999, the company has maintained a clean balance sheet and was in a net cash position at the end of 2001 ($50 million). According to a pre-sale report produced by Standard & Poor's, it had an EBITDA interest coverage ratio of 51.4 times at the end of 2001 and the agency says it expects the company to maintain a healthy 13 to 15 times ratio even as it gears back up over the next few years.
Debt to capitalization, for example, currently stands at 28%, with S&P commenting that the company is likely to build this up to about 40% to 45% over the coming few years. The new debt is being used to fund $800 million in capex, which the company intends to use to counter declining production at its mature fields through the aggressive development of its proven reserves.
For the first nine months of 2001, revenue totaled $419 million, of which E&P accounted for 79%, drilling 14% and methanol 7%. Of this total, EBITDA amounted to $241 million, giving the company an enviable EBITDA margin of 58%. Debt totaled $10.5 million, of which only $2 million falls due during 2002.
In the report, the agency says that the company's rating is, "underpinned by its high-quality cost profile and efficient operations and is based on the expectation that debt usage will increase."
Observers also point out that Medco is one of the world's most cost efficient producers and also Indonesia's most cost efficient producer, well ahead of its larger domestic competitor Caltex. Where, for example, the average global lifting cost of a barrel of oil is $4 (the amount required to get it out of the ground), Medco has achieved a $2 lifting cost.
This efficiency is said to buffer the company against any downturn in oil prices. Similarly, production-sharing contracts with state regulator Pertamina provide a further buffer as they are adjusted subject to oil prices.
