Gajah Tunggal attracts $1 billion in demand for bond top up

The re-opened 2010 bonds price at the tight end with investors confident about a healthy secondary market.
PT Gajah Tunggal, IndonesiaÆs largest tyre company, re-opened its July 2010 bond programme last night, pricing $95 million worth of 10.25% guaranteed senior unsecured notes via Credit Suisse and Lehman Brothers. The B2(stable)/B(positive) Reg-S transaction attracted a $1 billion order book.

The re-opened bonds priced at 102.75 (yielding 9.2%), in contrast to the existing bonds which were trading yesterday at 103.125 or 9.07%. The new issue price equates to a yield spread of 423.9bp over two-year Treasuries. The transaction tapped the companyÆs existing $325 million bond programme due to mature in 2010, raising the total size of the programme to $420 million.

In terms of geographical split, 73.4% of the bonds sold to Asia, 16.6% sold to Europe and 10% to US offshore accounts. Investor-type breakdown was not available.

The proceeds will be used to fund the companyÆs motorcycle tyre and radial tyre production expansion, as well as providing research and development facilities.

Investors were pleased to note an attractive concession on the new bonds, which were initially priced at 102.5. Sources stated this price was cheap to the outstanding, and felt the bonds would perform extremely well on the secondary market. The transaction attracted a significant amount of demand, and, with the existing bonds holding their ground on the secondary market, the price tightened to 102.75. Sources close to the deal say that no orders were lost as the price tightened.

Gajah Tunggal issued its 2010 bonds via lead managers Credit Suisse First Boston and UBS just three years after the companyÆs 2002 restructuring. The Nursalim-owned Gajah Tunggal group ranked as one of Indonesia's most heavily geared borrowers prior to the Asian financial crisis and ended up in a CSFB-led debt restructuring. The company also issued a $295 million FRN in 2002, sole-managed by JPMorgan Chase, due to mature in 2008.

The company benefited from a ratings improvement yesterday, with Standard & PoorÆs revising its outlook from stable to positive, and assigning a B rating to yesterdayÆs bonds. According to the report, the companyÆs Ebitda margins in 2006 fell to 12% from 14% in 2005.

A May 2007 fixed-income report from HSBC recommends neutral on Gajah Tunggal. Despite the 2010 bonds being fairly priced, the companyÆs ratings are constrained by high liquidity needs, according to the HSBC analysts. These are driven by high capex requirements for $20 million and $35 million projected spending in 2007 and 2008 respectively, as well as debt refinancing. The company has $77 million of debt maturing over the next two years, which will require external funding. Total debt-to-Ebitda and total debt-to-capital declined to 3.7 times at the end of the first quarter 2007 from 6.3 times in the fourth quarter of 2006, the report states, while total debt-to-capital remained unchanged at 63%.

The company enjoys a leading market share in Indonesia, and ranks 27th among tyre manufacturers globally. It benefits from a strategic alliance with Compagnie Generale des Etablissements Michelin.

Market observers were surprised that UBS was not on the mandate. Some say the appointment of Mira Arifin to Lehman Brothers as head of debt capital markets for Indonesia led the Swiss bank to lose the account.
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