Volatile capital markets and the recent installation of new management has led to a review of how the company plans to fund the purchase of Deutsche Telekom's strategic stake in its cellular subsidiary Satelindo.
Indosat has until the end of September to settle the balance of a $325 million purchase price for the 25% stake, which will take it up to full ownership. So far, $65 million has been paid through internal cash, with the remainder secured via a promissory note, which falls due on September 30. Bank Mandiri has also extended a Rp1.5 trillion ($169 million) loan, but this is believed to fall due by the end of the year and will need to be re-financed.
To meet the payment, management originally mandated Merrill Lynch for a $150 million to $200 million high yield bond issue and Mandiri Sekuritas for a Rp1 trillion to Rp2 trillion domestic bond issue.
Since then, however, a new board of directors has been appointed by the government following its disappointment with a divestment in late May, which had to be scaled back from 11.32% to 8.1%. Global markets have also become increasingly more volatile and conscious that the company now has less certainty of funding and less time to obtain it, management are said to favour either a bridge financing or syndicated loan ahead of a capital markets exercise.
But observers say that while the dollar bond has been pushed back from its August launch slot, it remains on track for early autumn with Merrill Lynch still on board, albeit fighting a rear guard action to make sure that than none of its competitors ease it out. Indeed, the company is already believed to have done a lot of preparatory work for the dollar bond and observers say that management believes funding sources need to be spread over a number of markets.
They are also said to want to raise funds for capex at the same time as the strategic stake is financed and believe that it is better to fund upfront rather than unsettle investors by continually re-accessing the market. Stage two of this funding is likely to take the form of an equity issue, with Indosat previously indicating that it will issue a non pre-emptive rights issue for 5% of its equity capital.
According to credit analysts, Satelindo will step up capex following a $75 million capital injection from Indosat, which lifts restrictive bank covenants constraining expansion to just $50 million a year. As ING Barings writes in a recent research report, "We expect Satelindo to spend a total of $800 million over the next three years for network expansion in comparison to Telkomsel's budgeted capex of $1.5 billion."
Observers also believe that although the government did not give PT Telkom permission to access the offshore high yield markets, it will allow Indosat to do so because it has some dollar revenues that partially mitigate of currency risk. According to the company s 2001 Annual Report, approximately 9.8% of consolidated international call revenue was derived from net settlements with foreign carriers. Amounting to Rp214.5 billion ($24 million), this would at least cover annual interest payments.
In terms of a break-even analysis with the domestic market, it is probably still slightly more cost efficient to tap the international market despite the fact that domestic rates have dropped quite sharply over the past few months. Where, for example, the SBI one-month rate stood at 17% at the beginning of the year, it had dropped to 14.97% by the end of June. This is roughly the level most bankers believe Indosat could secure all-in dollar funding after taking the costs of both the bond and currency hedge into consideration.
However, Indosat would undoubtedly have to pay slightly more in the domestic bond market and particularly given that PT Telkom is in the process of completing a Rp1 trillion five-year bond issue with a coupon of 17%.
Many believe that international investors would more readily embrace a dollar bond by Indosat over Telkom because the former incorporates 100% of Satelindo's Net Asset Value against 65% of Telkomsel's, which is also 35% owned by SingTel. According to BNP analyst Manoj Nanwani, Satelindo accounts for about 60% of Indosat's overall earnings and unlike Telkomsel will not now be spun out via a domestic IPO.
In the company's 2001 Annual Report, Satelindo was consolidated into the accounts for the first time. Total debt on a consolidated level stood at $984 million, of which short-term debt amounted to $336 million and long-term debt $638 million. Of this amount, Satelindo's debt amounted to $510 million. As a percentage of debt to equity, Indosat reported a gearing level of 105%. As of December, it also held $252 million in cash and deposits.
To price a dollar bond, there are two outstanding comparables: a $150 million five non-call three issue for B+/B3 rated Telkomsel and a $225 million blended FRN for Satelindo, which is unrated. The former is currently trading at 102.06% to yield 9.2% or 518bp over Treasuries. The latter comprises three FRN's maturing from 2004 to 2006, which are typically quoted as a debt package rather than individually. On a blended basis, the deal is currently being quoted on a yield of about 12%.
