Indofood adds to Indonesian credit universe

The company ups the ante with Indonesia''s largest dollar bond offering since the Asian financial crisis.

Lead manager Credit Suisse First Boston sets off on roadshows this Friday with a $200 million five-year bond offering for the Republic's tenth largest company by market capitalization. Pricing of the B/B3 rated deal is scheduled for mid-June with tentative expectations for a yield around the 10.5% to 11% mark.

This will place Indofood Sukses Makmur slightly above the current secondary market trading level of PT Medco Energi, which has a one-notch higher rating of B+ from Standard & Poor's. As of yesterday's Asian close, Medco's $100 million March 2007 deal was bid at 10.5% to yield 610bp over Treasuries, while a recent April 2007 issue for B+/B3 rated PT Telkomsel was bid at 9.9% to yield 540bp over Treasuries.

In its favour, the First Pacific owned company has a more established track record with investors than Medco and unlike its predecessor has never defaulted on its debt. Indeed, the noodle manufacturer is one of the most well respected companies in the whole Indonesian credit universe and consequently one of only a handful that was able to secure any form of dollar funding in the years after the Asian crisis - two short term syndicated facilities for $50 million and $75 million pre 2002.

From a gross debt position of $1.2 billion in 1997, the company also reduced the amount to a gross debt level of $569 million as of March 2002 and is said to view its latest financing as an exercise in debt management rather than reduction. During roadshows, however, the company will need to address two issues that have been highlighted by analysts in recent days - its maturity schedule for 2002 and its Rupiah revenue base.

As Barclays Capital puts it in a research report published yesterday, "So are we going back to the good old days where Indonesian corporates borrow offshore, hedged or otherwise, and then kid themselves that their revenue stream is linked to the US dollar? For Indofood this may be the case as 87% of its sales are local."

Where the maturity schedule is concerned, Indofood has roughly $250 million of debt due in 2002, of which $200 million matures over the next two months. To date, $57 million has been re-paid and the company secured a $100 million two-year facility from ING Barings in March that carried a spread of 250bp over Libor. In addition, the company was also said to have an $83 million cash position as of end-March.

Where the currency mismatch is concerned, about 88% of Indofood's revenues are denominated in Rupiah and 60% of its costs in dollars, the latter largely as result of importing wheat from Australia and Canada for its flour mills. During 2000, this led the company to book a foreign exchange loss of Rp150 billion ($17 million) and during 2001 a gain of Rp72.5 billion ($8 million) as the currency strengthened against the dollar.

Year-to-date, the Rupiah has been one of the world's best performing currencies and having strengthened from Rp10,400 at the end of 2001 to a Rp9,000 level as of May, is poised to increasingly benefit the company's non-operating income. In terms of being able to meet its debt repayments, Indofood also pursues a highly conservative hedging policy by Indonesian standards covering up to 90% of its dollar debt. And observers add that while this is expensive, the net net cost is still cheaper than borrowing in the domestic bond market.

Consequently Indofood has extremely healthy debt ratios for a low single B credit, recording a debt to EBITDA ratio of 2.6 times 2002 earnings and an EBITDA to interest coverage ratio of 3.5 times. Debt to capitalization, by contrast, is a more aggressive 55%.

These ratios have encouraged the company to opt for a less restrictive covenant package than Medco, which was strapped in with maintenance rather than incurrence covenants, has limitations on subsidiary indebtedness beyond $15 million and incorporates dividend protection measures inhibiting any changes preventing dividends being upstreamed from the operating companies.

By contrast, Indofood has incurrence covenants that cap debt at two times pro forma EBITDA, allows subsidiary indebtedness up to $165 million and has standard restrictions on dividend payouts, allowing payment up to 50% of net profit. But in its ratings report, Moody's comments that, "Historically the two companies (Indofood and parent First Pacific) have operated independently and the pressure to upstream cash from Indofood through dividend payment has been low."

For many outside observers, one of the major challenges for the deal is its size. Because it will carry a 100% risk weighting, it will have not have wide appeal to the Indonesian banking community and like Telkomsel before it, will need to secure a wider international investor base. Success, on the other hand, will show that the investable pool for Indonesian paper remains strong despite the recent wash of deals from Mandiri, Medco, Telkomsel and soon the mobile operator's parent Telkom.

The credit story is also expected to emphasize Indofood's dominant market position, its integrated and, therefore, efficient cost structure as well as the growth potential both domestically and overseas. The company dominates the packaged foods business in Indonesia with a 17.1% market share during 2001 compared to a 9.4% share for its nearest rival Nestle.

Where individual product segments are concerned, it controls 87% of the noodle market, 71% for flour, 50% for edible oils, 72% for margarine and 51% for snack foods. Branded goods also comprise 71% of total sales.

Observers say that it was able to survive the financial crisis, largely because it was able to cut capex, increase volume and pass on substantial price increases. Noodle prices, for example, have risen 136% since 1997 and flour by 293%.

And as one specialist says, "Revenue has grown from Rp1.4 trillion in 1994 to Rp14.7 trillion in 2001, a CAGR of 41%."

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