The AFL bond will be repaid at par and bond holders will receive the accrued and unpaid interest since the last coupon payment on September 30, 2006. The bonds were due for repayment on September 30, 2010 and could be recalled early on the date of every semi-annual coupon payment beginning from September 30, 2007. However, Antam will recall the remaining $171 million of bonds 10 months earlier than planned due to the cancellation of the Avoidance of Double Taxation Agreement between Mauritius and Indonesia (Indo-Mauritius DTA) at the end of 2004, which was not expected at the time of issuance, and caused the withholding tax rate to double to 20%.
ôWe have made every attempt to solve the problem caused by the cancellation of the Indonesia-Mauritius DTA and therefore avoid invoking the early redemption clause of the bonds, but feel we are left without any options but to repay earlier than planned, according to what is allowed by the bond agreement,ö explains AntamÆs president director Dedi Aditya Sumanagara.
He adds: ôWe value our good reputation in the international bond market, especially as regards the future financing of our growth projects, and we regret the inconvenience caused to our bond holders. Indeed, we wanted to pay a sweetener, but if we didnÆt precisely follow the terms of the notes we could possibly have run into legal trouble.ö
AntamÆs wholly-owned Mauritius subsidiary, AFL, issued the $200 million bond on September 30, 2003 and then loaned the funds to Antam to help finance the FeNi III nickel expansion, which is now nearly complete. The Indo-Mauritius DTA allowed for a reduction on the withholding tax levied against the interest payments on the on-loan made from AFL to Antam, to a rate of 10%. Antam, the guarantor of the notes, was responsible for paying the withholding tax. After the Indo-Mauritius DTA was cancelled the tax rate doubled to 20%. The higher tax rate caused the rate of AntamÆs bond interest charges, which are grossed up to include the tax rate, to increase from 8.19% to 9.22%.
According to the terms and conditions of the AFL bond, Antam has the right to redeem the bonds early if the rate of withholding tax exceeds 10%, which was the rate when the AFL bond was issued. To exercise the right to redeem the bonds early, the bond agreement requires that Antam take ôreasonable available measuresö to avoid the obligation.
The rationale of doing the tax call is to reduce the financial charges of the company, which increased significantly due to the doubling of the withholding tax rate to 20%. AntamÆs advisors say they also indicated to management that given all possible measures have been taken to solve the problem following the cancellation of the Indo-Mauritius DTA, to not invoke the tax call as per the terms and conditions of the notes would probably not be satisfactory to the majority shareholder and could potentially cause an audit by a government body as regards the actions of management.