Deutsche and co-lead UOB Asia announced the Reg-S only deal on Monday last week with an initial guidance of 11%. With a series of anchor orders in place, the leads priced the deal on Friday night (October 20). Final pricing came at 97.666% with a coupon of 10.75 to yield at 11.375%. That represents a spread of US Treasuries plus 662.6bp or Libor plus 593bp.
The deal, rated B/B+/BBB+(S&P/Fitch/National Fitch), closed approximately three-times oversubscribed with a total of 30 investors from 12 counties taking part. Geographically, the deal was split 53% in Asia, 24% in Europe and 23% in US offshore accounts. In terms of account type, funds bought the majority of the deal walking off with 62%, banks bought 32%, and retail accounted for the remaining 6%.
Comparables for the deal are relatively scarce due to the fact that there arenÆt many corporate deals for a 5.9-times leverage credit in the market. Indeed, the deal lacks any definitive comparables, however investors were mostly looking at existing Indonesian high-yield corporate Gajah Tunggal. Gajah Tunggal has a five-year deal worth $325 million which is rated B2/B and is currently trading at around 11.20%.
Fajar has a relatively precarious financial profile. The company struggles with a high-leveraged position and vulnerable cashflow protection measures. As at the end of 2005, Fajar had a debt-to-capitalisation ratio of 56%. With the completion of the deal, FajarÆs debt-to-Ebitda ratio is estimated to grow to around 55%-60%.
However, the consolidation of the companyÆs aggressive expansion programme and the added benefit of additional cashflows from its successful sack kraft business should have a positive affect on the companyÆs financial position over the next 12 months. It is estimated that FajarÆs debt-to-Ebitda ratio should drop to below 3.2 times by fiscal year ending 2007.
"The rating on Fajar reflects its aggressive financial risk profile, project risk, price volatility in a highly competitive industry, single-site manufacturing facility and vulnerability to foreign exchange fluctuations," says Standard & Poor's credit analyst Vasudevan Rajarathnam. "However, these weaknesses are partially offset by its cost efficient operations, long standing customer relationship, and improving product and geographical diversity.
"Although the sack kraft project is successfully completed, sustained demand from export and domestic markets, competitive pricing, adherence to buyers' quality standards are quite crucial for the expected business and financial turnaround of the company," Rajarathnam says. "The stable outlook is driven by the expectation that the company will remain cost effective, supported by the revenue and geographical diversities enhanced by sack kraft line. Successful market penetration and sustainable market shares, both domestically and externally for sack kraft, are key factors for stability in the rating. Any unanticipated operational hiccups in the new line can potentially delay the expected business turnaround and negatively impact the rating."
In its rating report, S&P stated that: ôthe credit profile reflects Fajar's cost-efficient operations supported by its ability in using higher proportion of recycled paper (97%-99%) with low virgin pulp (1%-3%) mix. Its efficiency is also supplemented by having its own power plant and by curtailing capital cost by using high-quality, second-hand machinery with suitable new spares, without affecting its output quality.ö
Proceeds from the sale of the notes will be used to refinance $72 million in syndicated loans with the balance being used to repay other debts and for general working capital purposes.
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