First Pac: did it get enough cash?

First Pacific''s downsized bond issue may not be sufficient for its pressing needs.

First Pacific has managed to price its debut high yield bond issue - collateralised by its holding in Indofood - but the question remains whether it has raised enough. The deal, when originally mandated, was envisioned as a $150 million three year transaction with a coupon of around 6.5%.

In the ensuing weeks market conditions deteriorated and the bond ended up being scaled back to $115 million with an 8.25% coupon. The company - which is cashflow negative - needed to raise the funds principally to repay a $107.4 million loan to ING (according to page three of the bond documentation).

A $150 million bond would have been ideal for repaying this loan, plus ensuring there was enough cash left to service the interest payments and make a capex investment in the company's Indian mobile phone company, Escotel. However, the $115 million it has raised makes achieving the above objectives somewhat tighter. Indeed, the bond documentation also points out on page two that an escrow account will be used to ensure that bondholders get repaid the first year's interest.

At an 8.25% coupon this equates to $9.5 million. That means straight off the bat, $107.4 million is going to ING and $9.5 million into an escrow account. That equals $116.9 million, an amount greater than the bond itself.

This would not matter if First Pac was swimming in cash. But it isn't, which is precisely the problem. Its only source of non-debt related cashflow is a $12 million dividend from Indofood and its outgoings include an estimated $7 million for headquarter overheads, as well as the interest expense already mentioned.

On that basis, it will be cashflow negative in 2003 to the tune of around $4.5 million. Until PLDT starts paying dividends this situation will not improve (a situation conservatively estimated to occur in 2006).

But back to the bond.

Underwriters and lawyers will have to be paid, which is likely to see another $2 million of cash exiting the company. That means that after raising $115 million of new cash, about $118.9 million has already been paid elsewhere.

This means there is no money left for the capex injection into Escotel. This was reckoned by First Pac to amount to $14 million, although some think the real need is closer to $40 million. Escotel needs the money to stay competitive at a time when rivals are upping the ante in its Indian telecom circles.

In simple terms, for every dollar that isn't spent, it becomes easier for rivals to take market share. What are First Pac's options then?

Its CFO, Paul Wallace has previously told FinanceAsia he has had offers to borrow $50-60 million against the company's controlling stake in PLDT. Clearly that would be sufficient to fund the Escotel capex.

However, that money was envisioned as a safety net, not as the source of Escotel capex. Wallace told FinanceAsia that this money would be used to ensure that First Pac could meet its obligations under the collateral agreements on the just-priced bond.

The structure of the bond puts the company's Indofood stake at risk if things start to go wrong with Indofood's stock price or the value of the rupiah versus the dollar. The structure sees a Mauritius holding company taking enough Indofood stock to cover the value of the bond.

Based on First Pac's 51.9% stake in Indofood, and the Indonesian company's current stock price, as well as the level of the rupiah, a $115 million bond would be 3.6 times covered today by the value of First Pac's Indofood stock. However, should the value of the coverage fall - due to either a depreciating rupiah or falling Indofood stock price (or both) - then some interesting things happen thanks to the bond's covenants.

If it falls to 2 times (ie a value of $230 million) then First Pacific has to top the structure up with cash. If it goes to 1.8 times, First Pac has to immediately refinance the whole bond or else the trustee of the bond has to immediately liquidate the position by selling the Indofood stock in the market.

When the Bali bombing happened, Indofood's stock fell to levels that tested these coverage ratios, and the speed with which crises in Indonesia can happen is something no one can neglect - least of all First Pac's controlling shareholder,

Anthoni Salim, for whom Indofood is his crown jewel asset that he would be loath to lose. Therefore, First Pac will be conscious that any cash raised from a loan on its PLDT stake should be held in reserve for the eventuality that the collateral needs topping up.

The question is, will that be at the expense of the Escotel capex? Thus a classic trade-off has opened up.

Does First Pac risk funding Escotel to ensure the telco asset does not fall behind its competitors (and lose value as an asset) or does it hold the PLDT-backed loan in reserve in case a crisis hits Indonesia - so it can use the money to protect its Indofood stake?

These unpalatable choices are the result of some of First Pac's poor decisions in the recent past. For more on this, see the cover story of this month's FinanceAsia magazine.

Now that the company has completed its bond, it has at least refinanced the ING loan. But short of its divesting assets, the company is not in a position to do anything active in the next three years of the bond's life and must hope that PLDT starts paying dividends as early as 2005.

In this scenario, equity investors will continue to ask the question, what is the point of First Pacific anyway? It has two good assets (Indofood and PLDT) but investors can own them without buying First Pac stock.

And with the complexities and uncertainties added to First Pac's story by this collateralised bond issue, it would be hard to argue to an equity investor that it didn't make sense to buy the two individual stocks instead of the once high-flying conglomerate.

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