According to sources, investors objected to some of the terms on the Credit Suisse-led deal, which was obvious by the fact that the price dropped below par in the grey market shortly after the launch in the early evening Tuesday (Hong Kong time). Some traders said they were offered as low as 98.75% of face value.
In particular, investors didnÆt like the fact that there was to be no adjustment to the conversion premium in case the company decides to pay a special dividend following the sale of a 30% stake in two mining assets. The $1.3 billion sale, which was announced at the end of March, is set to be completed in May or early June and is widely expected to result in an extra distribution to BumiÆs shareholders.
The company has said that it plans to use at least $900 million of the proceeds from the asset sale to repay debt, which suggests there wonÆt be that much left for a special dividend. Still, the fact that the term sheet specifically stated that bond holders wouldnÆt be compensated was like a ôred flagö to investors that an extra payment was indeed on the cards. To not have access to that û whatever the size - would destroy the value of the bonds and not surprisingly investors kicked up a fuss.
There were also complaints about the aggressive conversion premium, which included a step-up feature in years four and five, and about the uncertainty related to the credit. This is also the first Indonesian bond to be offered to the international market after the countryÆs supreme court upheld a ruling that declared a $500 million guaranteed bond transaction invalid, effectively allowing the issuer to default on its repayments at the expense of the bond holders.
As a direct result of this ruling, the Bumi 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. While the rather blunt warning is unlikely to have been what toppled the issued, it was obviously not helpful and may have served to focus investorsÆ attention on whether the price did adequately compensate them for potential risks, including the lack of legal protection.
Rather than simply re-offer the bonds below par û which might not have changed the situation as the key concern wasnÆt just a case of the pricing being too aggressive û sources said Credit Suisse yesterday attempted to re-negotiate some of the terms with the company, including the possibility of a special dividend compensation, to make the deal acceptable to investors.
However, Bumi was said to have been willing to make only minimal concessions to the original terms and faced with the possibility of having to come back to the market with a deal that might fail for a second time, the bookrunner is believed to have advised the company to withdraw the offer altogether. This was an advise that the countryÆs largest coal exporter was willing to take given that the alternative would have been to accept significantly watered down terms û which it clearly wasnÆt prepared to do.
Consequently, shortly after the close of the Indonesian market yesterday, Credit Suisse announced that Bumi had decided not to proceed with the offering pending the completion of the mining asset disposal.
ôWhile it is expected by all commentators that the (acquisition) is a 95% certainty, there is clearly a risk that something could prevent it from closing,ö notes one observer. ôOnce it is closed and certain and the proceeds are in, (the company) would be able to access the market and achieve their desired terms in a way that they werenÆt able to do last night.ö
That may be, but it that doesnÆt change the fact that the CB was launched with certain terms that were almost poised to be rejected by investors, especially since the Asian market had already seen $4.1 billion worth of issuance in the past couple of weeks.
ôRight now, with so much paper coming to the market, investors are a little price sensitive. This is probably going to be short-termàbut it shows that although the market is hot, it doesnÆt take everything,ö says one banker not involved in the deal.
Credit Suisse has been a financial adviser to Bumi Resources for close to 18 months during which it has advised the company on several M&A transactions, including the most recent sale of 30% in the two mining assets to IndiaÆs Tata Power, and there is no question that the investment bank knows Bumi well. However, this time it does appear that it misread the market and agreed to terms that were overly optimistic to say the least.
ôWe all do deals that are difficult and we have to buy at 99 or 99.5, but to have to keep the books open for the next day and then try to change major termsàit is unusual to get it that wrongö argues another CB banker.
The bonds, were issued by special purpose vehicle Enercoal Resources but guaranteed by Bumi and convertible into treasury shares held by the company. They were to have had a five year maturity with a three-year put and a yield to put of 6.25% to 7.25%.
They were also offered with a fixed conversion premium of 45% over TuesdayÆs close of Rp1,370 for the first three years, increasing to 55% during the fourth year and to 60% during the fifth year. While many investors were said to have been unhappy about that step-up, it really wouldnÆt have had much impact on the actual valuation since the put option would have meant that the bonds were valued as three-year paper.
Similarly, it would have mattered little that the coupon was to be stepped up to 1% in years four and five after being set at zero per cent in the first three years.
The provision of a credit bid would have been more of an issue, given BumiÆs rather weak credit and the fact that neither the issuer nor the guarantor has a credit rating, but several sources said the bookrunner hadnÆt been willing to provide a bid until yesterday. The level it used, they said, was 350 basis points, which some CB specialists said was fair and others argued was about 100 basis points too low.
One source close to the issuer claimed that Credit Suisse had provided a credit bid for between one third and half the deal size at approximately 350 basis points or slightly above, which suggests that perhaps the issue was that there wasnÆt enough asset swaps provided to meet the demand.
One CB specialist noted that it would have been very difficult for the bookrunner to source any form of credit bid, however, because of the ambiguity of the credit profile and the fact that the credit currently is predicated on the successful sale of the coal mining assets and the resulting infusion of cash.
ôIf the divestment for some reason werenÆt to be completed there would be a step-up in the credit and it would be very difficult to build in the same of step-up feature into any kind of vanilla CDS or asset swap,ö he says.
Since there is no stock borrow available for Bumi investors are unable to hedge the equity option and if they felt the hedging opportunities for the credit were also inadequate it would have meant buying the CBs essentially on an outright basis.
According to the term sheet, the yield to put/maturity was to increase by 125 basis points in the event that the sale didnÆt happen, but this would have been almost meaningless since a collapse of the agreed disposal would likely also trigger a drop in BumiÆs share price that would have more than offset that.
The share price is up 55% so far this year, compared with a 10% gain in the Jakarta Composite Index, amid higher revenues and expectations that higher oil prices will boost the demand for coal. Bumi has also been buying back its own stock in market since May last year, offering additional support to the share price. It is some of those shares that are now being ôre-soldö to the market in the form of CBs.
Bumi, which is a part of the Bakrie Group that is controlled by the family of Indonesia's Coordinating Minister for Welfare, said last week it may buy back a further 575 million shares at a price up to Rs1,800 apiece û a price that suggests 28% upside from todayÆs prices.
More surprising, perhaps, was the fact that the share price continued to gain yesterday while the company was struggling to place the CBs. At the end of the day, the share price was up 2.2% to a new 52-week closing high of Rp1,400.
Bids and offers for the CB in the grey market also edged slightly above par in the afternoon, although that was primarily driven by speculation that the bonds were going to be re-priced.
If it hadnÆt been withdrawn, this would have been only the second international CB transaction out of Indonesia since 2005, following a well-received $176.9 million offering by Medco Energi last year. Credit Suisse and Deutsche Bank were joint bookrunners on that deal.