Excelcomindo makes high yield debut

Indonesia''s third cellular operator completes the largest high yield deal from Indonesia since the financial crisis.

Joint leads Credit Suisse First Boston, Morgan Stanley and UBS priced an upsized $350 million bond issue for PT Excelcomindo Pratama yesterday (Thursday). The deal initially had a base size of $250 million, but was increased on the back of a $1.3 billion order book and now tops rival Indosat's $300 million offering as the largest from the country in over seven years.

Final pricing of the five non call three transaction was settled at 99.495% on a coupon of 8% to yield 8.125% or 514.5bp over Treasuries. This was marginally inside initial guidance around the 8.375% area.

There is also a call option at 104%.

A total of 145 accounts participated with a geographical split that saw 51% placed in Asia, 26% in Europe and 23% in the US. By investor type, asset managers took 57%, retail 21%, banks 16% and insurance companies 6%.

At first glance, pricing seems unfeasibly wide compared to Indosat, which has the same B2/B+ rating and raised $300 million from a seven non call five issue last October. Led by Barclays, Goldman Sachs and ING, the deal was priced at par with a 7.75% coupon to yield 411bp over interpolated treasuries. This deal also had a premium call at 103.375%.

But, there are three major differences between the two companies. Firstly, both Indosat and Telkomsel benefit from the halo effect of their majority owners from Singapore - ST Telemedia in the case of Indosat. In many ways this makes both companies' Indonesian bond issues leveraged Singaporean plays and the yield they offer is typically very attractive to retail investors in the Lion City.

Secondly, Excelcomindo has a much smaller market share than either of the two market leaders: Telkomsel currently stands at 50%, Satelindo 30% and Excelcomindo 16%. Company management have, however, forecast that subscribers are likely to grow by at least 45% during 2004 from 2.9 million at the end of last year to roughly 4.2 million by the end of this year.

Thirdly, the company is not as well funded as either of its two rivals and there is uncertainty over its future ownership. The Rajawali group, which hold a 60% stake through PT Telekomindo Primabhakti, have long made known their willingness to sell and there has been rampant speculation that a regional telco such as China Telecom or Telekom Malaysia will step in to try and capture earnings in the fast growing Indonesian market. The company's other major shareholding is Verizon of the US.

In its rating release, Moody's said that the company has a reasonably solid financial profile for its rating level - interest coverage of approximately 11 times, debt to EBITDA under three times and retained cash flow to debt in the mid 20% level expected for 2003.

The new bond issue also has a debt incurrence test imposing a debt to EBITDA cap of 3.5 times through to 2006 and three times thereafter.

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