Indonesia’s largest thermal coal producer, PT Bumi Resources, has raised $150 million from the sale of an upsized convertible bond that will make use of the remaining Treasury shares on its books and raise fresh cash to cover pre-mining development and exploration costs at four of its mining concessions.
The deal comes less than three months after the company completed a $300 million CB transaction and, given the current pressure on the credit markets, it seems the coal miner decided to play it safe and issue an almost exact copy of that bond. Getting no points for innovation, it has kept the entire structure – five-year maturity with a three-year put and a zero coupon – as well as the price terms. Credit Suisse was the sole bookrunner on both transactions.
“Two months ago they might have wanted to push the price a bit, but in the current market environment, that may not have been possible,” notes one observer. And in any case, thanks to the recent share price gains, the absolute conversion price is much higher this time at Rp3,250 than the Rp2,362.50 it achieved in June, he adds.
Last night’s deal was launched with a fixed conversion premium of 25% over yesterday’s close of Rp2,600 and a fixed yield of 8.125%, which are the same terms that were arrived at through a bookbuilding exercise last time around. This time, investors had no input on the price, but had to take it or leave it. And somewhat surprisingly, since a share price rally has made the bonds issued in June much cheaper than the current offering, they decided to take it.
According to a source, the deal was just under three times covered at the original size of $125 million after only 45 minutes, which prompted Credit Suisse to make use of all the company’s Treasury shares and add another $50 million to the deal. It also closed the books at that time as there would have been no point in building the book further and, with the US on holiday, Bumi was clearly not targeting investors there anyway.
Observers say the demand would have been driven by the positive outlook for Indonesian coal, which is also evident by the 38% rise in Bumi’s share price since the previous CB issue on June 6. The company’s improved fundamentals – the previous CB was used to settle its last outstanding debts – and expectations of better transparency and corporate governance following Tata Power’s 30% investment in two of its coal assets earlier this year would also have played a role.
Still, the strong demand for the CB was unexpected when considering that Credit Suisse didn’t provide any credit bid for this transaction and the fact that the credit spread has widened from about 400bp to 450bp-550bp, depending on which investor you ask. Based on the lower end of that range, the CB issued last night would get a bond floor of 96.1% and an implied volatility of 23%. At the top of the range, the bond floor falls to 93.4% while the implied volatility increases to 29%.
By comparison, the previous issue had a bond floor of 94.4% and an implied volatility of 27% at launch, based on the provision of credit default swaps at 400bp for half the deal. Those bonds are now trading at 106%-107% of face value and the conversion price is 9% below the current share price, which gives them a much higher equity value than the new issue.
Like last time, there is an issuer call after two years, subject to a 125% hurdle and the bond holder will be compensated for dividend above a dividend yield of 2.5%.
Bumi Resources is currently on a week-long equity-focused non-deal roadshow that will see the management visit Singapore, Hong Kong and London, and early yesterday, the company issued a statement saying that it was considering various financing alternatives to utilise its remaining 364.966 million Treasury shares. But with this CB now completed, there will be no further plans for a potential equity issue, one source says.
According to yesterday’s statement, Bumi expects to produce approximately 59 million tonnes of coal in 2007, of which is plans to ship 58 million tonnes. The latter represents a 16% increase over 2006 when it shipped 50 million tonnes. The company sold 28.3 million tonnes of coal in the first six months of this year.
Analysts also remain positive on the stock with 11 of the 12 analysts who follow the company having a “buy” recommendation. The 12th recommendation is a sell. Several banks have target prices above Rp3,000, which implies another 15% upside from the current levels. Credit Suisse, which has a long-standing relationship with the company, is one of the most bullish with a target price of Rp3,400.
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