Asian high-yield bond issues continue to find robust support among investors throughout the world. In the secondary markets they have outperformed European and, especially, US high-yield paper for two consecutive weeks. Spreads have tightened by as much as 53bp, according to Morgan Stanley.
So, the launch of Berau Coal Energy’s $500 million deal on Tuesday was to an enthusiastic audience — and made the company’s statement a month ago that it intended to raise funds at a maximum interest rate of 9% seem rather conservative.
The issue was priced late Tuesday afternoon, New York time. It pays a 7.25% semi-annual coupon and was re-offered at par with a final maturity date of March 13, 2017. The notes traded higher in Hong Kong and were quoted 100.75 to 100.88 early yesterday afternoon.
Annisa Lee, an analyst on Nomura’s sales and trading desk, pointed out in a note on Monday that Berau is a repeat issuer with solid credit fundamentals and has a high likelihood of calling its existing bonds in July 2013. And bearing in mind the shortage of good quality high-yield issues in the market, Lee said she expected the order book for the new issue to be very strong, so the tight pricing was no surprise.
The final price guidance had fallen to a yield range of 7.25% to 7.5% by late yesterday afternoon, Hong Kong time.
The notes were sold under the US SEC’s Rule 144a. Global investor presentations during the past few days elicited a positive response and the book-building process gathered rapid momentum. By late Tuesday, the joint-bookrunners — Bank of America Merrill Lynch, Credit Suisse and J.P. Morgan — had orders totalling $9.5 billion from 428 accounts.
According to a banker familiar with the transaction, “very few of those orders were price sensitive”.
Asset and fund managers bought most of the issue (73%), and 17% was placed with banks, 5% with company treasuries, 3% with insurers and 2% with others. The geographical split was more balanced. European investors were allocated 22%, Asia received 38% and 40% was sold into the Americas.
The new senior secured notes rank on par with the existing $450 million 2015 notes issued by Berau Capital Resources in 2010. They have many features in common. Both have a similar collateral structure, including first priority liens on the company’s debt service and interest reserve account, pledged shares of restricted subsidiaries and a cash and accounts management agreement.
Guarantees for the new issue are provided by subsidiaries. These include its main operating subsidiary, Berau Coal, as well as Armadian Tritunggal, Empire Capital Resources, Winchester Investment Holdings, Aries Investments, Seacoast Offshore and Maple Holdings.
There is a non-call provision before three years and a change-of-control clause that allows holders to put the bonds back to the issuer at 101.
The issue is rated BB- by Standard & Poor’s and one notch lower at B1 by Moody’s. Both agencies raised the outlook for Berau to positive last month.
Most of the proceeds will be used to repay a senior secured $340 million credit facility, which has tighter financial covenants (tough maintenance ratios of leverage and Ebitda interest coverage); the balance will be used to fund working capital and capex requirements.
Berau plans to spend $691 million during the next three years to expand its exploration and production, up from an original target of $450 million to $475 million, the company said in late February.
Berau has a 90% interest in Berau Coal, which is Indonesia’s fifth-biggest producer and exporter of thermal coal. It operates three active mines from a single site in East Kalimantan, and has estimated resources of about 1.9 billion metric tonnes, with probable and proven reserves estimated at 467 million tonnes. Berau’s market share is about 6% based on production volume of 17.4 tonnes in 2010. According to Moody’s, this indicates a reserve life of around 22 years, which is higher than its remaining concession period of 12 years.
This provides some buffer against the regulatory and legal uncertainties in the Indonesian coal industry. These range from disputes over tax payments to the consequences of new mining legislation
London-listed Bumi owns 85% of Berau and, between them, Bakrie & Brothers and Samin Tan’s Borneo Lumbung Energi & Metal jointly own 29.9% of Bumi’s voting share capital and 47.6% of its issued share capital.
Berau is exposed to any strategic changes in Bumi, despite the more stringent corporate governance standards imposed on it due to its listing on the London Stock Exchange. During the past few months there has been a dispute between Nathaniel Rothschild and the Bakrie family and their partner, Samin Tan, over control of the company.
On the other hand, there are safeguards. For instance, a cash and accounts management agreement made in July 2010 governs the bank accounts of Berau and its operating subsidiary Berau Coal, and remains in place. Proceeds from coal sales are allocated to different reserve accounts, including tax reserve, operating expense, operating reserve, debt service and distribution accounts.