Berau Coal Energy issues $350 million high-yield bond

Indonesia’s fifth largest coal producer, Berau Coal Energy, reopens Asia’s high-yield market despite a looming legal dispute and a difficult market backdrop that has kept other borrowers from printing.

The Asian high-yield markets were reopened last week with a B2/B rated $350 million five-year issue from Berau Coal Energy. It was the first deal to come to market from a single-B borrower since Melco Crown Entertainment issued its $600 million 10.25% eight-year bond in mid-May.

The bonds pay a coupon of 12.5% and were priced at par. The maturity date on the 144A/Reg-S senior secured notes has been set to July 8, 2015, but they are callable after three years.

The issuer was Berau Capital Resources, with Berau Coal Energy and all of its active subsidiaries, including coal producing entity Berau Coal, as guarantors.

Investors looked to Adaro (7.75% $800 million, 2019), Bumi Resources (12% $300 million, 2016), Indika Energy (9.75% $230 million, 2016), and Bukit Makmur Mandiri Utama, or Buma, (11.75% $315 million, 2014) as comparable bonds for this issue. When the roadshow started on June 22 all these bonds were trading within a price range of 103.6 to 105.75 -- Adaro was offering a yield of 7%, Bumi 10.9%, Indika 8.5% and Buma 10.6%.

At the time of pricing on Wednesday, June 30, the yields had pushed out for all bonds, with Adaro quoted at 7.55%, Bumi at 11.5%, Indika at 8.7% and Buma 11.5%.

The swings in the high-yield market were reflected in the Standard & Poor's volatility index (VIX) which at the beginning of the roadshow was trading at about 27, but by pricing had risen to 34.5 -- an increase of 28%.

With a price at par and a yield of 12.5%, Berau fared well in comparison given not only the performance of the comparable bonds, but also an extremely difficult market backdrop that has kept other issuers from coming to market over the past couple of months.

On its first day of trading, the tone in the markets was not good with a weaker session across the board in Asia, partially due to the bank holiday in Hong Kong. However, by Friday, there was a more constructive pitch in the market and Berau's new 2015s were trading up. The bonds dipped slightly below par shortly after pricing but closed the first session at a bid of 100.45. On Friday it opened slightly higher at 100.60 and traded up to 101.

While most of the deals issued in the second quarter were completed intra-day and without a roadshow, high-yield borrowers need to do their legwork to sell the credit.

"Quick intra-day execution is not an option so an element of luck is needed with the tone of the broader market," said one banker. "Issuance windows in recent weeks have been short and sweet, with any stability being short-lived," he added.

Also, in the lead up to the pricing of the bonds, Berau was faced with a lawsuit that US hedge fund Farallon had filed against it, claiming its right to a small stake in the company.

Farallon's claim, made through an entity called Montelena, arose when the former owners of Berau (before Recapital bought it in November 2009) failed to hand over some 3,622 shares that were due under a call option.

According to an offer document issued by Berau prior to the roadshow, the exercise of the option would translate into a 3% shareholding and trigger a breach of a debt covenant that states that Recapital must maintain its 90% interest in Berau. The remaining 10% is owned by Japanese trading and investment company Sojitz Corp.

However, a source familiar with the deal said, "an agreement was reached between all parties prior to pricing and the legal action was dropped", staving off a possible event of default on the transaction.

The deal was two times covered with orders from about 100 accounts. Strong demand came from Asia-based investors, who took 42% of the deal. Offshore US investors bought 39% and European investors the remaining 19%. Fund managers received the bulk of the allocation with 81%, while banks were given 7%, insurance and pension funds 6% and retail 5%.

Berau last issued bonds in December 2006 when it came to market with a $325 million dual-tranche five-year deal. Despite the 3.5-year absence investors were familiar both with the name and the credit story, given its position as the fifth-largest coal producer in Indonesia.

Lead arrangers for the deal were Credit Suisse and Deutsche Bank, with Credit Suisse also acting as global coordinator. The bonds have been rated B2 (stable) by Moody's and B+ (stable) by Standard and Poor's.

The proceeds from the deal are expected to be used for the refinancing of other debt plus the partial acquisition of Maple Market Company.

¬ Haymarket Media Limited. All rights reserved.

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