Best Non-Investment Grade Bond Deal
PT Adaro's $400 million senior secured notes issue
Lead managers: Goldman Sachs, JPMorgan
Legal counsel: Milbank Tweed Hadley & McCloy, Latham & Watkins, Bahar & Partners
This category was by far the most difficult to judge in the fixed income awards. Adaro's landmark transaction was up against Vietnam, which bought a tightly priced debut issue to market this year after a 10-year wait and numerous stops and starts.
But we decided Adaro deserved the award because it is so symbolic on a number of fronts. During a year in which market windows in the high yield space have opened and shut very rapidly, Adaro was well timed when it came to market in late November.
However, its true significance lies in the structural aspects of the deal and what these represent. One of the big growth areas in Asian capital markets is leveraged finance and the funding needs of the international private equity firms, which have been swarming into the region.
Here is an LBO (leveraged buy-out) and one in Indonesia to boot - a country which investors are only just starting to warm up to again. The structure underlying this deal enabled Noonday Asset Management - an affiliate of one of the world's largest hedge funds, Farallon Capital Partners - to acquire the operating assets of the Adaro coal mines in Indonesia.
It was only be able to do so because of the structured nature of the deal since the Indonesian government forbids foreign interests to own more than 51% of domestic entities. Noonday's 33% stake is held via the Mezzanine tranche of a $950 million financing facility.
The balance is held by a group of Indonesian businessmen who increased their equity stake from 40% to 66% via the injection of $50 million in equity, but effectively cashed out at a premium to the current valuation of the coal mines. How Noonday controls the local parties through their shareholding agreement has not been disclosed.
The acquisition was financed through a $570 million senior secured credit facility, a $353.6 million mezzanine facility and $50 million in equity. Proceeds from the bond issue, together with a senior secured loan facility, were used to repay the credit facility.
This was the second interesting part of the transaction. Never before in Asia has a borrower played bond and loan investors off against each other in order to leverage the pricing it can achieve. In this instance, Adaro offered a $400 million five-year bond rated B3/B+ and a four-year amortising term loan.
Demand was much stronger than expected and having built an order book of $1.75 billion, the group was able to price at a yield of 8.75% and upsize the bond portion from $300 million to $400 million. In terms of distribution, it was sold down to a wider and deeper investor base than is found in usual high-yield offerings, having been allocated to 111 accounts consisting of both high-yield and emerging market investors in the US, Europe and Asia.
The other interesting aspect of the transaction is the cash flow waterfall mechanism. This governs the flow of funds and prioritizes payments to the bank and bond investors over those in the mezzanine facility.
It does so because revenues are collected in collection accounts supervised by JPMorgan that are maintained in Singapore for the US dollar receivables and Indonesia for the Rupiah receivables. About 76% of Adaro's 2004 revenues were US dollar denominated.
Cash is then transferred back to the company to pay for operating expenses and taxes. Residual cash is then transferred to a cash trap account and a debt service account to service the bond and loan investors. Only if a certain debt service coverage test is met, are mezzanine holders paid.
Best Investment Grade Bond Deal
Republic of Korea's Eu500 million & $400 million global bond
Lead managers: ABN AMRO, Citigroup, Goldman Sachs, UBS
Legal counsel: Simpson Thacher & Bartlett, Cleary Gottlieb
The Republic of Korea has completed one international benchmark bond every year for the last three years running. Its November 2005 transaction was particularly noteworthy and indeed it had to be because the Ministry of Finance and the Economy (MoFE) faced considerable legislative resistance to getting a deal off the ground.
In fact a transaction was only approved once officials had spelled out a series of strategic objectives they hoped to achieve. The subsequent dollar and euro issue achieved all of them and for once the government did not try and grab every last basis point off the table. For this it was rewarded with stable aftermarket performance and is one of the reasons why we consider the deal the stand-out investment grade bond of the year.
Two years ago, Korea pushed its deal in too tight and it immediately popped in the secondary market. In 2004, it tried to push pricing again and having pulled the deal, eventually had to settle for pricing 8bp wider when it came back to try and execute it for a second time a few months later.
This time around, the government's execution was flawless. Possibly because of the legislative hurdles it had faced, the deal had been carefully thought out. Strategically, the sovereign wanted to establish its inaugural euro benchmark and push out its dollar curve to 20-years.
Believing itself to be a double-A credit hidden under a single-A rating, the sovereign was also keen to re-price the Korean credit curve, while not losing a wide and stable investor base. In the end, the euro tranche priced at 36.1bp over Bunds, or 25bp over mid-swaps - well through the new issue level for new Korean 10-year dollar paper.
More significantly it achieved the tightest pricing in euros for an Asian sovereign issuer. In doing so, it priced through China's curve, which it had historically traded back of, and has continued to trade there ever since.
The 20-year tranche came at 95bp over treasuries, some 10bp inside of initial guidance. It also set a new benchmark for Asian long bonds. The deal came at an implied 32bp differential over its 10-year paper on a swaps basis. Prior to this, PTT had been traading on the tightest differential at 51bp, while CNOOC sat at the other end of the scale on a 72bp differential between its 10 and 30 year bonds.
As hoped for, the Republic also managed to diversify its investor base. Because of the euro tranche, there was a much stronger European component accounting for 86% of the Euro tranche and 49% of the dollar tranche.
The deal was further boosted after Fitch upgraded the sovereign rating to A+ shortly after North Korea outlined its intent to eliminate its nuclear arms programme and rejoin the six-party talks.
Best International Securitization, Most Innovative Deal
IndoCoal's US$600 million Future Flow ABS
Lead manager: Merrill Lynch
Legal counsel: White & Case, Sidley Austin Brown & Wood
It is rare to enter the awards seasons and find a deal that everyone in the market believes should win. IndoCoal's transaction is one such deal.
It emerged against a backdrop of limited asset-backed issuance from South East Asia. Investors have generally remained uncomfortable investing in complex structured credits from this part of the region, and issuers continue to over-rely on the debt capital markets to raise funds. Both have served to limit the development of their respective securitization markets.
Indeed, when Merrill Lynch announced its intention to launch a $600 million future flow securitization for PT Bumi Resources mining units, PT Kaltim Prima Coal (KPC) and PT Arutmin Indonesia (IndoCoal), the market was to say the least skeptical.
Indonesia had been on the radar screens for most securitization bankers for some time now. This deal, nevertheless, came as a surprise to many. Few believed it would be able to secure an investment grade rating. It got one from Fitch, which rated the deal BBB-.
However, the nub of the issue was whether investors would be receptive to a deal associated with a group linked to Aburizal Bakrie, the country's chief economics minister and a long time ally of the Suharto regime. The 2001 restructuring of Bakrie group debt is often flagged as a prime example of the difficulties foreign creditors may encounter trying to negotiate terms in a country with the risk profile of Indonesia.
This is what makes IndoCoal's deal that much more impressive despite its yard long list of firsts and largests. It is, for example, the first Indonesian securitization since the Asian Crisis; the first Asian future flow securitization since the crisis; the first Indonesian investment grade deal since the crisis; the largest single tranche non-sovereign issue from Indonesia since the crisis and largest non oil & gas securitization.
At the heart of the deal is a bankruptcy remote, Cayman SPV, which holds all the receivables - out of the hands of the Bakrie group. Under the structured, KPC and Arutim transferred the respective rights and responsibilities of their coal concessions to two newly incorporated Indonesian SPV's, which in turn entered into a seven-year coal supply contract with the Cayman SPV, which directly sells the coal it purchases to obligors. In turn, these customers average a single-A credit rating and have no history of non payment.
Merrill's second structuring issue concerned the volatility in coal prices. The investment bank came up with an innovative front-loaded amortization structure, which should mitigate the underlying asset's price instability.
Best Domestic Securitization, Best Islamic Finance Deal
Cagamas M$2.05 billion RMBS
Lead managers: ABN AMRO, HSBC, AmMerchant Bank, CIMB
Legal counsel: Wong & Partners, Zaid Ibrahim & Co
It isn't every day that you get to unveil a debut award with a global first. Typically here in Asia, new structures or asset classes are, for the most part, transplants from our European or American cousins.
However, as Malaysia continues to cultivate its reputation as a global Islamic financing hub, Cagamas's Islamic residential mortgage-backed securitization delivered a groundbreaking deal that truly tested the capital market investor's appetite for Syariah- compliant instruments. The world's first rated- Islamic RMBS introduced a new asset class to both domestic and international capital markets that has wide appeal for both conventional and Islamic investors.
Syariah-compliant products prohibit paying or receiving interest and bans investments in tobacco, alcohol or gambling businesses. Under the Musyarakah Islamic structure owners of these notes share a percentage in the profits of the trust venture.
Cagamas' deal wins the award on the basis that it establishes the standard for an Islamic ABS market. It walks, talks, acts and looks like a proper securitization and was fully Syariah compliant, while also achieving AAA ratings from both of Malaysia's major rating agency's: Rating Agency Malaysia and Malaysia Rating Corporation.
The success of this deal opens up the capital markets for other Malaysian borrowers looking to issue similar deals in the future. Furthermore, the six-tranche multi-tenured deal, with tranches ranging from three-years to 15-years, effectively established a benchmark yield curve for further long-term Islamic ABS offerings.
The deal's strength can be judged by its response. Despite a 2% appreciation of the Ringgit just prior to pricing, the deal still managed to close with over M$3.5 billion in orders - an order book 6.5 times oversubscribed.
The deal also helps to further introduce Cagamas to an international investor base, which will be significant for the mortgage corporation and for the burgeoning Asian ABS Market as it promises a rich pipeline of future deals. Although Malaysian investors accounted for over 70% of the total 81 accounts, it is significant to note that Hong Kong investors, who had been noticeably absent from Cagamas' previous deals, made up a substantial portion of the off-shore investor base.
Best Bank Capital Deal
Chinatrust's $500 million upper tier 2 bond deal
Lead manager: JPMorgan
Legal counsel: Simpson Thacher & Bartlett
A $500 million deal for Chinatrust in mid-March was a landmark for Taiwan. Never before had there been a dollar denominated deal with true international placement from the country, let alone a bank capital transaction.
Chinatrust's perpetual step-up ten offering, therefore, had huge rarity value and this undoubtedly helped the lead to leverage in pricing. From the outset, many had expected the Baa1/A- rated deal to price above 100bp over Libor.
Initially the leads marketed the deal around the 90bp area, before tightening the range to 85bp to 87bp over. The transaction still garnered a huge order book of $4 billion, allowing the borrower to upsize the deal from $300 million to $500 million.
However, in a bid to ensure a strong secondary market opening, it also opted to price in the mid-point of the revised range at 86bp over.
In getting the deal to market, the lead had spent many months haggling with the local regulator. In particular there had been a lot of discussion about Taiwan's contentious 20% withholding tax on coupon payments. Chinatrust was eventually able to get round the issue after securing permission to launch a deal through its Hong Kong branch and use funds to finance its offshore expansion plans.
The only negative aspect to the transaction was its subsequent trading pattern a few weeks after launch. The maelstrom caused by the downgrades of Ford and GM had a negative impact on Chinatrust's deal and at its widest it traded out to about 135bp over.
However, the deal held up much better than other Asian credits most notably Shinhan Bank, which had only recently issued an extendible 30-year deal rated BB+/Baa3. At the time Chinatrust priced, it was trading at 88bp over Libor. It subsequently widened out to almost 180bp over before coming back in over the course of the year to the 130's again.
Best Local Currency Bond
Hongkong Land's S$700 million bond
Lead managers: DBS, HSBC
Legal counsel: Allen & Gledhill, Allen & Overy, Shook Lin & Bok
The dual tranche Hongkong Land bond was a groundbreaking transaction in Singapore that saw the Hong Kong property company launch its first ever Singapore dollar bond. The issue size was quickly increased from S$500 million to S$700 million, due to overwhelming investor demand following the roadshow, with the offering closing 1.8 times subscribed.
The deal represented the largest ever Singapore dollar issue by a foreign issuer and ranks as the largest Singapore dollar transaction of the year. It is also one of the largest local currency issues from anywhere in Asia this year.
The bond was split between a five-year tranche (S$325 million) and a 10-year tranche (S$375 million). The deal successfully achieved Hongkong Land's objectives of raising its profile in the Singapore market, diversifying its investor base and achieving long-dated funding that priced inside the company's outstanding US dollar bond issues.
In turn, Singapore investors flocked to the deal. Despite the fact that many Singaporean property developers tap the domestic bond market, not many have ratings and even fewer the credit quality of a Hongkong Land. While also a property deal, it also offered diversification away from the Lion City.
Best Structured Loan
Colony Capital's $700 million stapled financing
Mandated Lead Arrangers: Credit Suisse First Boston, Calyon, Aareal Bank
Legal counsel: Wilkie Farr & Gallagher, Venture Law, Latham & Watkins, Rajah & Tann
When we sounded out loan professionals, there were few who quibbled with the quality of this transaction. The loan was part of an M&A transaction that saw private equity firm, Colony Capital buy Singapore hotel company, Raffles for S$1.72 billion. What was particularly innovative here was that this represents the first time stapled financing has been used in Asia - although it is quite common in the US and Europe.
Stapled financing is a tool that private equity firms like. What it does is put in place a standard financing package that all bidders in an auction can choose to drawdown, should they win. For the seller of the asset, the benefit is it provides certainty of funds and closure. And typically the M&A advisor to the seller - in this case CSFB had that role - will offer the staple financing and hence add to its advisory fees, with a fee from the capital raising exercise.
This five-year transaction is the largest pure LBO financing in non-Japan Asia since 2003 and the largest ever in Singapore. It was structured with cash sweep mechanisms and small yearly amortizations, and was a multi-currency senior secured facility. It saw 12 banks participate, including UOB and Goldman Sachs. The margin was an extremely healthy 2.50% making it one of the most lucrative loans of the year.
Best Vanilla Loan
San Miguel's $1.15 billion acquisition bridge financing
Mandated Lead Arrangers: ABN AMRO, Barclays, HSBC, Standard Chartered, SMBC
Legal Counsel: Clifford Chance
Both our loan awards this year involve M&A situations, and in this case a bridge was offered to San Miguel to finance its A$5.45 billion bid for Australia's National Foods. The five mandated lead arrangers - ABN AMRO, Barclays, HSBC, Standard Chartered and SMBC - committed to acquisition financing of $1.85 billion, making this the largest ever corporate loan for a Philippines borrower. It broke all the bank's country limits and each one had to seek special approvals from their credit committees.
The commitment was made in January against a backdrop of a ratings downgrade for both the Philippines and San Miguel to BB- by Standard & Poor's. In spite of the tough conditions, and unfavourable outlook on the Philippines, the response to the syndication was strong with 29 banks eventually joining.
However, all the banks needed to maintain flexibility, especially when Fonterra raised its own bid for National Foods, and the banks had to return to the drawing board and rethink the financing.
In April, San Miguel's bid was approved and general syndication was launched. With the benefit of a rights issue, San Miguel no longer needed quite so much cash, and only $1.15 billion was syndicated. The deal was priced at Libor plus 90bp, making the financing considerably tighter than where the Philippines sovereign can borrow in the loan market. The bridge was refinanced in October with a $650 million takeout financing - with the balance due to be raised by National Foods in the Australian debt markets.
The loan gave San Miguel absolute certainty of funding at a time when borrowing in the Philippines was a challenge. Absent this bridge facility, San Miguel would have found it a challenge to succeed with its bid.
Best Project Finance Deal
Nam Theun 2
Sponsors: EDF, EGCO, Italian-Thai Development Public Company Limited, Government of Laos
Banks: ANZ, KBC, Standard Chartered, BNP Paribas, ING, Fortis, SG, Calyon, BOTM
Multilaterals and ECAs: ADB, World Bank, Coface, Nordic, Pofarco, ThaiExim
Legal counsel: Allen & Overy, White & Case, Clifford Chance
You know a deal is significant when it represents 80% of a country's GDP. The Nam Theun 2 hydroelectric project in Laos is just that. The World Bank's managing director, Shengman Zhang notes: "We see Nam Theun 2 not as a project per se, but as a vehicle through which to make considerable progress in the reduction of poverty."
The $1.58 billion hydroelectric power project will see Laos generate 1,070MW of power, of which only 75MW will remain in Laos, and the rest will be sold to Thailand - making this a vital export for the relatively poor Laotian economy.
The project will cover 450 square kilometres and construction will take four-and-a-half years, with the creation of a reservoir integral. For a deal of this magnitude, it is perhaps not that surprising that this project has had a long gestation - with France's EDF doing the first work on Nam Theun 2 all the way back in 1993.
It took innovative structuring and the involvement of supranationals and export credit agencies to make the financing work. The project, which closed in March, will be financed through $1 billion of debt, $450 million of equity commitments (including $113 million from the government of Laos) and $132 million of bonding commitments which related to the take-or-pay contract signed with Thailand's EGAT.
Adding complexity was the dual currency nature of the financing, with $500 million raised from international banks and Bt20 billion raised in Thailand. At 17 years, this is the longest ever tenor for a Lao-domiciled borrower. Political risk guarantees for both Laos and Thailand were given by the Asian Development Bank.
This deal encompassed five legal jurisdictions and is the largest internationally financed power project in Asia since the financial crisis. For Thailand it will produce affordable power and for Laos it will help to raise living standards. In this instance complex financing will end up tangibly improving people's lives.
Best Structured Product Deal
Start CLO's $2 billion Synthetic Securitization
Lead manager: Deutsche Bank, Standard Chartered
Legal counsel: Sidley Austin Brown & Wood
In a year where the Asian securitization market has been dominated by domestic synthetic offerings, Asia's largest ever cross-border securitization is the stand-out for the year's best structured product award.
At $2 billion, the five tranche START collateralized loan obligation (CLO) offered international investors a unique opportunity to gain Asian exposure via an asset pool consisting of 40% Asian entities. The portfolio contains high-quality and welldiversified obligors from across three continents. The remaining 60% are AA or AAA rated names from the US and Europe, such as GE and Disney.
By using a synthetic structure, START - a wholly owned SPV of Standard Chartered - allowed the bank to securitize investment grade loans from 24 countries originated in a variety of currencies into a single transaction. Furthermore, the existence of stringent eligibility standards and replenishment criteria helped to ensure that the underlying asset pool will not deteriorate in quality as the offering matures.
Upsized from $1.5 billion to $2 billion on the back of strong investor demand, the deal finished well oversubscribed and had a deep distribution spread across Europe, the Middle East and Asia.
In creating a new source of liquidity and access to capital, the deal is clearly a benchmark going forward for future lenders looking to free up regulatory capital in order to meet demands for client funding and has established Standard Chartered as the primary name in cross-border CLO issuance.