We talk to CFO Navin Sonthalia about the company''s recent bond issues, ongoing acquisition rumours and its IPO plans.

At $350 million your inaugural bond issue sold in January is the largest corporate bond from Indonesia in nearly seven years. You must be very pleased with the recent deal?

Yes, we're very pleased with the result. This clearly reflects the confidence that the international investors have in Indonesia, the telecommunications sector in the country and Excelcom in particular. Our issue is being considered as a benchmark for other forthcoming bond issuances out of Indonesia.

The pricing of the bond was quite wide relative to your peers at Telkomsel and Indosat. Why did you offer such generous terms?

As regards Telkomsel, the bond will be called soon and thus its yield cannot be used a comparable. Relative to Indosat, we believe that we have achieved a competitive yield. Both Indosat and Telkomsel benefit from their foreign and government shareholding and their larger size. We were able to increase the size and yet were able to tighten the pricing on our bonds at the same time through the bookbuilding process. This, we believe, demonstrates investors' comfort with the business and financial fundamentals of Excelcom.

Included in the bond issue was a covenant capping debt to EBITDA levels at 3.5 to 3 times. Will this not constrain your ability to achieve 45% annual subscriber growth?

Our EBITDA remains strong and is expected to grow steadily with the increase in overall subscriber base. The company's business plan is fully funded and has allowances for appropriate cash cushions in case of contingency requirements. Thus, growing EBITDA and no requirement for additional debt will enable the company to maintain healthy debt : EBITDA ratios. At present we have a cash balance in excess of $100 million and with all of the EBITDA being ploughed back into the business for capital expenditure and business growth, we feel that we are adequately funded to achieve the planned subscriber and operating performance growth.

What was the biggest challenge you faced in the bond issue process?

A debut international bond issue of this size definitely involves a lot of challenges. On the business side, while almost all investors were convinced about the prospects for the Indonesian cellular sector, we had to explain our positioning strategy and our comfort in being the number three player in the industry. The competitive environment was certainly something that investors focused on and minus the evident shareholding support of our two major competitors, we had our task cut out in terms of convincing investors about the company's and the management team's track record and credibility. The success of the bond issue, we hope, will signal to the markets that investors have bought into the Excelcom story.

Going forward what are your financing plans?

We have concluded two major capital market transactions in the last six months: the Rp1.25 trillion local bond and the $350 million bond. We believe that with these we are well positioned in this high growth industry. The company will continue to monitor the market and evaluate it on a regular basis. A future financing exercise will look at a further strengthening of the capital structure and we do not really expect any need to come back to the bond markets in the near term.

When you do come back, will you be looking at the international markets or more at domestic fund raising now that rupiah interest rates are so low?

Our Rp1.25 trillion issuance last year was aimed towards taking advantage of the lower domestic interest rates at a time when the currency was fairly stable. We tapped the dollar bond market in order to fully repay our dollar syndicated debt and gain some duration in our debt structure. We will continuously monitor the appropriate currency mix of our debt in line with prevailing market conditions, liquidity and cost of funding. As we have mentioned, we do not foresee any significant incremental debt funding requirements in the near term but will continue to evaluate the currency mix of our financing.

How do you hedge your interest rate exposure and currency exposure?

Our dollar bond is 100% fixed at 8% coupon a year, thus there is no interest rate exposure as such. Almost 93% of our Rupiah bonds are fixed rated with only the balance 7% with floating rates in the latter years, that too with appropriate caps and floors in place. Thus, the overall interest rate exposure is taken care of by the bond structures. In the past, the interest on the secured debt was based on floating LIBOR + margin and we had put into place appropriate cap options for more than 50% of the debt outstanding.

As regards currency exposure, we regularly evaluate various instruments that could provide some cost-effective hedging alternatives. Long term hedging was almost unavailable in the past. Thus, it was a case more of availability than of willingness. With the overall improvement in the economy and reduced volatility of the local currency, banks are beginning to be more forthcoming in offering various long term hedging alternatives. We do have dollar revenues that cover a significant portion of our dollar interest payments. Also, we do not have any short-term foreign currency debt maturities due. In addition, most financial institutions expect the Rupiah to remain strong or even strengthen from current levels. Having said that, as a professionally managed corporate we are extremely focused on all aspects of risk management and cost-benefit permitting, we look forward to having in place appropriate hedging instruments for a reasonable portion of our total outstanding foreign exchange debt.

There is much talk in the markets about a possible acquisition of PT Excelcomindo. Is there anything you can say about this?

There is nothing I can add at this point in time than what all of us read in the press. Lately, we have been very focused on the Rupiah and dollar bond issuances.

How about your public plans to seek an IPO?

There are no confirmed plans as such. An IPO plan will eventually depend upon the company's requirements and objectives, and the shareholder requirements and objectives. Market conditions of course always play a major role. As a professionally managed organization, we ensure that the company is always prepared for any financing exercise so as not to miss an opportune time. It was for this reason that we were able to complete two major capital market exercises in the last 6 months.

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