Indosat mandates bond as PGN prepares to re-launch

Following the consolidation of its cellular subsidiary Satelindo, PT Indosat is preparing to re-finance over two thirds of its outstanding debt.

Late last week the company mandated ING and a group of local and international banks for a combined dollar and Rupiah bond issue, which it hopes to complete at the beginning of the fourth quarter. On the international side, ING - Indosat's advisor on its merger with Satelindo - will be joined by Goldman Sachs and Barclays.

Both of the latter two banks are close to Indosat's new owner, Singapore government owned ST Telemedia, which purchased a 42% stake last year. The Indonesian government still holds 15% and the remaining 43% is in free float.

Goldman, for example, has a longstanding corporate finance relationship with ST Telemedia, while Barclays recently extended bridge financing. On the domestic bond side, ING has been teamed up with Andalan Artha Advisindo Sekuritas (AAA).

The domestic bond issue is expected to comprise a Rp3 trillion ($353 million) transaction, while the international issue will have a base size of $150 million and an intermediate maturity. At the end of the first quarter, Indosat had Rp8.266 billion ($974.2 million) in consolidated debt of which Indosat accounted for roughly $380 million and Satelindo roughly $544 million. Net debt to equity stands at 49.9%.

Given that all debt falls due in either 2006 or 2007, analysts say it makes sense for the company to re-finance as much as possible before the issue becomes critical and while interest rates remain low. Re-financing under the umbrella of a single credit structure should also enable the company to take advantage of the halo effect of ST Telemedia and the fast growing cellular operations, which will now drive the company's earnings base.

During 2002, international call revenues accounted for 31.6% of the total compared to 48.4% for cellular and 20% data. Indosat is also one of a select handful of Indonesian credits, which can claim some dollar revenues to mitigate currency risk.

Net settlements with foreign carriers have typically amounted to about 10% of consolidated revenue and can at least cover annual interest payments.

In terms of pricing, Indosat's most direct comparable will be PT Telkomsel, although the latter's AAA rating from Pefindo stands two notches higher than Indosat's AA+. As of Friday's trading the cellular company's April 2007 bond callable in 2005 was trading at 109.75% to yield 5.01%. This equates to 316bp over two-year Treasuries or 363bp over Libor.

Ahead of Indosat, PT Perusahaan Gas Negara (PGN) stands at the head of the Asian pipeline with a $200 million bond issue that should price in the early part of the week. Credit Suisse Boston is lead manager of the 10 put seven deal, which was postponed in early August following the bomb blast in Jakarta.

The deal is still being marketed on a coupon of 7.75% and is said likely to have a slightly higher bias towards domestic investors than originally planned. This is because international investors are more sensitive to the fact that spreads have not quite sprung back to where they were previously.

PGN has the B3/B- rating of the Indonesian sovereign and its two pricing benchmarks will be B+ rated E&P company PT Medco and sovereign rated Bank Mandiri. Both have 2008 bonds outstanding.

PT Medco has slightly underperformed the rest of the Indonesian universe and its May 2008 issue is currently yielding 8.85%. This equates to 442bp over 10-year Treasuries or 436bp over Libor. Mandiri's April 2008 bond, on the other hand, is currently yielding 6.37%. This equates to 296bp over five-year Treasuries or 264bp over Libor.

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