Bumi Resources returns with postponed CB

The greatly restructured offering goes down well with investors, allowing the coal producer to raise $300 million for debt repayment.
Indonesian coal producer PT Bumi Resources last night returned to the market with the $300 million convertible bond issue it was forced to pull six weeks ago because investors thought the terms were too aggressive.

Last nightÆs version has much more attractive terms, however, including a lower conversion premium and a significantly higher yield. But more importantly, it has an altogether cleaner structure û having got rid of the coupon and conversion premium step-ups - and contrary to last time gives investors full compensation for the special dividend that the company will pay after selling two of its coal mines.

This did the trick - the deal was more than three times covered and attracted over 60 investors, including some fixed-income accounts that bought the deal on the back of Bumi being a well-regarded high-yield name. The company is part of the Bakrie Group that is controlled by the family of Indonesia's Coordinating Minister for Welfare.

High demand allowed the conversion premium to be fixed just below the mid-point of the indicated 21% to 31% range - at 25% - but the yield was pushed all the way to the wide end of the 7.125% to 8.125% range. Last time around, the bonds were offered with a fixed conversion premium of 45% for the first three years, which was to increase to 55% during the fourth year and to 60% during the fifth year. They were also offered with a yield to put of 6.25% to 7.25%.

The basic structure of the bonds hasnÆt changed however. They still have a zero coupon, a five-year maturity and a three-year put and there is an issuer call after two years, subject to a 125% hurdle (up from 120% last time). The bonds are issued by special purpose vehicle Enercoal Resources but are guaranteed by Bumi and convertible into treasury shares held by the company.

Credit Suisse also retained the sole bookrunner mandate, despite talk in the market that at least three other banks had been lobbying Bumi for a chance to take over the lead after the Swiss bank failed to get it done on the first attempt.

The return with the same bookrunner explains the complete restructuring of the offering as it would have been unthinkable for the bank to fail a second time. Not only is Credit Suisse one of the most active international investment banks in Indonesia, but it also has a long-standing relationship with the issuer, having advised it on several M&A transactions over the past 18 months, including the most recent sale of its 30% stake in two mining assets to India's Tata Power.

Back in April, Credit Suisse was said to have tried to renegotiate some of the terms with the company after it became obvious the market wasnÆt going to accept them, but according to sources Bumi was willing to make only minor concessions to the original term sheet. So how come the management all of a sudden had no problem with a much lower conversion premium and a higher yield?

With regard to the former, one obvious reason is that the companyÆs share price has rallied 38% since the CB was first offered to investors on April 24. The gains have been partly due to positive news related to the coal sector overall.

A couple of days ago, UBS re-rated the entire sector and revised up its target prices for a number of coal producers. This led to a spike in share prices across the board, including a 9.7% gain for Bumi. Also supporting the share price over the past six weeks has been the companyÆs announcement that it plans to buy back a further 575 million shares from the market at a price up to Rs1,800 apiece.

Based on the market price at the time of the initial CB offering, a 45% premium would have given a conversion price of Rp1,986.50, while a 25% premium on top of yesterdayÆs (June 6) close of Rp1,890 results in a conversion price of Rp2,362.50. Consequently, Bumi has been able to secure funds at a higher share price, even though the premium has come down.

And while the higher yield obviously doesnÆt work in the companyÆs favour, a move up of three-month Libor in the past weeks from about 5% to 5.4% did mean the company had no choice but to lift its offer at least a little bit to adjust to this new environment.

Looking at the underlying assumptions, Credit Suisse also increased its credit bid to 400 basis points over Libor from 350 basis points last time. Sources say the bank provided credit default swaps to cover half the deal. While this may still seem tight for an historic high-yield issuer like Bumi, observers say the credit is expected to tighten once the sale of the mining assets has been completed as the bulk of the $1.3 billion in proceeds will be used to pay down debt.

The money raised from the CB will also be used to settle the outstanding amount of a $300 million term loan at its Enercoal Resources subsidiary, and after these two events the company will be completely debt free aside from the convertible bonds.

ôThere were lots of takers of both the credit and the bonds and I think the trading in the aftermarket should be good,ö says a source close to the transaction.

Bond holders will be compensated for any dividends exceeding a dividend yield of 2.5% (improved from 3.5% the first time around) as well as for the Rp66 per share interim dividend that has been declared and will be paid out of the proceeds from the sale of the mining assets.

The stock borrow costs was assumed at 5% as there is virtually no lending to be had in Indonesia and CBs are typically bought on an outright basis.

This gave a bond floor of 94.4% and an implied volatility of 27%. While it matters little given the lack of hedging opportunities, the 100-day volatility currently stands at about 42% and the 260-day at 38%.

At $300 million this deal is the largest among the four CBs from Indonesian issuers since the Asian financial crisis, exceeding last yearÆs well-received $176.9 million offering from Medco Energi. Last month, PT Berlian Laju Tanker (BLT) raised $125 million from a CB that was said to have attracted buyers partly because of its scarcity value.

Like last time, BumiÆs term sheet included a full page which warned investors that they are unlikely to be able to effectively enforce either the bonds or the guarantee in Indonesia and may be exposed to damages awarded by Indonesian courts to the guarantor. This has become the norm on Indonesian bond issues after the countryÆs supreme court late last year upheld a ruling which declared a $500 million guaranteed bond transaction invalid, effectively allowing the issuer to default on its repayments at the expense of the bond holders.

While rather a blunt warning, sources say investors looking at Indonesia are well aware of this potential lack of legal protection and are treating it as part of the overall country risk. There were said to have been no particular concerns raised about this issue during the bookbuilding for the Bumi deal.
¬ Haymarket Media Limited. All rights reserved.
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