Bumi pays 12% for $300 million seven-year bond issue

Bumi Resources is the latest Indonesian coal miner to tap the dollar market, finding a gap through which to launch a high-yield bond late last week.

Bumi Resources took advantage of a barely open window late last week to raise $300 million through a seven-year deal. It was the fourth Indonesian coal miner to tap the dollar bond market in as many weeks, and Bumi was forced to pay a yield at the top of the range as investors began to take cover ahead of the year-end.

The deal, arranged by joint bookrunners Credit Suisse and Deutsche Bank, was priced late on Thursday (November 5) New York-time, a day after the monthly meeting of the US Federal Open Market Committee (FOMC), and a day before the closely watched US non-farm payrolls report. In addition, the leads were under pressure to launch the transaction last week before Bumi was forced to disclose new financials, in accordance with SEC rules.

Meanwhile, investors have already started to become more risk averse over the past two weeks, keen to book profits on strongly performing new bond issues this year, and reluctant to increase their exposure to new high-yield bonds, which like recent deals, they fear might soon trade under water, said a leading Hong Kong-based credit analyst.

The Bumi bond pays a 12% coupon and was re-offered at par. It matures on November 10, 2016, with a call option in 2013 at 106, another in 2014 at 103 and thereafter at 100. The yield translated into a spread of 894.5 basis points over the yield of the seven-year US Treasury benchmark.

Initial price guidance during a three-day multi-team roadshow -- in Hong Kong and Los Angeles, then Singapore and Boston, and finally London and New York -- at the beginning of last week indicated a yield range of 11.75% to 12%, although earlier whispers had been for a range of 9.5% to 10%. Some market participants believed the transaction could have been for as much as $500 million, but bankers close to the deal insisted that there was never any suggestion that it would be more than the eventual $300 million.

In October, three sub-investment grade Indonesian coal miners or mine operators issued dollar bonds that paid vastly different rates. Adaro paid a yield of 7.75%, Indika Energy paid 9.75% and Bukit Makmur Mandiri Utama (Buma) paid 11.75%

Bumi, despite its status as Indonesia's biggest coal miner, had specific points to address. The issuer, Bumi Capital, was guaranteed by Bumi Resources and also had subsidiary guarantees from Forerunner International, Sangatta Holdings, Kalimantan Coal and Sitrade Coal. But unlike the Adaro bond, which was issued at the operating level, Bumi's deal was at the holding company level.

In effect, as one banker pointed out, Bumi had to pay a "complexity premium". Investors were aware that Bumi doesn't own all of its two premier mines -- KPC (Kaltim Prima Coal) and Arutim -- that it is on an acquisition trail, and that the 19% internal rate of return on a $1.9 billion loan it raised from China Investment Corporation in September is significantly higher than the 12% payable on its new public bonds.

The bonds, rated Ba3 (stable) by Moody's and BB (stable) by Standard and Poor's, were sold to US investors under the SEC rule 144A and to other international investors through Reg-S, and will be listed in Singapore.

In the end, the order book amounted to $600 million with orders placed by 90 accounts. Geographically, the distribution was evenly split: 37% to the US, 33% to Asia and 30% to Europe. Fund managers were the biggest takers, with a 73% allocation, insurance companies and pension funds bought 14%, retail 7% and banks and others took 6%.

Yesterday afternoon in Hong Kong, the bonds were quoted at 100.875, for a yield of 11.81%.

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