Astra files for rights offering

ING and JPMorgan to lead a $100 million to $150 million rights issue for the Indonesian auto manufacturer.

A registration statement was filed with the Indonesian regulator Bapepam yesterday (Monday) allowing Astra to raise up to $150 million from a rights offering. The deal is contingent on the company's creditors approving its debt restructuring at a vote on November 26, followed by its shareholders approving the deal at an EGM on December 16.

ING and JPMorgan have been mandated as lead managers to the deal and both have a long-standing relationship with either Astra or its majority shareholder, Jardines-owned Cycle and Carriage. ING, for example, first led the company to market in 1991.

It had originally been thought that ABN AMRO would join the two, but the bank is already said to have other underwriting commitments in Asia and the actual amount that will need to be underwritten if most of the major shareholders take up their rights should be relatively small. NM Rothschild & Sons has been acting as advisor to the company on the restructuring of its dollar debt. UBS Warburg, which is also close to the company, has a junior advisory role in the rights issue.

Astra's major shareholders are Cycle and Carriage, which owns roughly 31%, Toyota Motor, which owns 7%, Norbax Inc, a nominee company owned by US fund management arm, the Capital group, which owns 6%, Singapore government-owned GSIC, which owns 5% and the IFC, which also owns roughly 5%. Cycle and Carriage has already indicated that it intends to take up its rights and observers say that most of the major shareholders either intend to take up their rights or increase them. Only one or two are not expected to participate.

Under the current schedule, the deal is expected to go ex-rights on about December 28 and at the end of the subscription period will trade for about five days in mid-January. Based on the company's current market capitalization of roughly $500 million, the deal will represent up to 30% of issued share capital at the top end of the range.

The leads have deliberately gone out with a very wide price range ahead of marketing the deal and lodging a final prospectus with Bapepam a couple of days before the EGM, which will set out the rights ratio and a final price range. At the moment the price range spans Rp500 (the par value of Astra International's share price) and Rp2000. The range is wide to ensure that a deal can be closed in the eventuality of both a stock price crash, or a sharp spike upwards.

Astra International closed yesterday at Rp1,725, having hit a year-to-date high of Rp5,025 in mid June and low of Rp1,425 in mid October.

Specialist say the company is currently trading on a p/e ratio of about two times 2003 earnings and expect a successful rights issue and debt restructuring to prompt a re-valuation of Rp5,000 to Rp8,000 per share.

The major remaining issue is the acceptance of Astra's debt restructuring by its creditors. The steering committee has already agreed to the restructuring and observers say this group accounts for about 40% of all creditors. At the full creditors' meeting on November 26, the company needs to obtain a quorum of two-thirds of creditors and get an acceptance rate from two-thirds of those present.

On completion of the rights offering, about 60% of the proceeds will be used to re-pay debt and the remaining 40% has been earmarked for working capital purposes. Analysts say that Astra's debt problems do not so much stem from the amount of debt it has, but the maturity schedule. Indeed, a number of the commercial banks are said to have been unhappy that they were forced to take another haircut from a second debt restructuring (the first happened in 1998), when the company has strong cash flows and could have completed an exchange offering in the public bond markets instead.

Under the terms of the restructuring, Astra has been given an option to extend both series II and series III debt from 2006 to 2009. Series I debt has already been re-paid.

The deal effectively allows the company to reduce its annual payments by about 44% according to analysts. Series II debt comprises $645 million in international debt and Rp703 billion in domestic debt, whilst series III comprises $96.6 million in international debt and Rr99.47 billion in domestic debt.

The successful completion of a deal will be good news for the Indonesian equity markets, where trading is still dominated by two telcos, a cigarette company and a handful of banks. Despite initiating a debt restructuring, Astra has always managed to stay current on its debt and in a country where long, litigious and contentious work-outs are the norm, it has managed to speed the process through quite quickly.

The company also recently reported relatively strong third quarter results, with operating profit improving 9.5% over the first nine months to Rp2.14 trillion ($23.7 million). Sales totalled Rp22.7 trillion. It has also been able to recoup some of its market share in the auto market, creeping back up to 45.1% share in October up from 40% over the summer months.

As UBS Warburg wrote in a recent research report, "We view the better than expected October sales figures as continued proof of the company's strong ability to generate cash flow.... The health of the operating entity confirms our belief that should Astra be valued on its core operations rather than short-term risk factors, the company would be heavily undervalued."