Asia's high-yield bond market had a good start to the year with investors clearly expressing their appetite for this kind of paper. And with Indosat's successful pricing early Friday morning of $650 million worth of fixed-rate guaranteed senior notes on the back of massive demand, this appetite is showing no signs of tapering off.
As one source wrote: "We are starting to see risk appetite coming back from the Asian accounts for high-quality names with decent yields after the recent market volatility."
News that the Indonesian telecom services provider was looking to price did not come as a surprise. In May the company announced a tender offer for its outstanding 2010 and 2012 bonds, and specifically said that the tender would be accompanied by the issue of a new 10-year bond.
The new bonds have a maturity date of July 29, 2020 and will be callable after five years. They pay a semi-annual coupon of 7.375% and were reoffered at 99.478 to yield 7.45%. This represents the tightest pricing and the lowest yield achieved for an emerging market high-yield telecom deal since the Lehman crisis in 2008.
The key story in this transaction is the $10.6 billion order book that the borrower managed to secure from over 400 accounts. Bankers on the deal claimed that it was the largest subscription ratio ever for an Asian bond offering (16 times the amount of bonds offered.)
Indosat announced the deal during the Asian trading session on Thursday last week and within an hour of opening the books, the borrower had accumulated $1 billion of orders from Asia alone.
One source close to the deal commented that being a 10-year and a 144A/Reg-S deal, the notes printed at the most liquid part of the curve. "This would explain the strong reception from accounts and the strong orderbook on the back of a good market backdrop," he said.
By the close of Asian trading on that same day, the order book had grown past $7 billion with both Asian and European investors looking to buy into the credit.
With such a large orderbook already accumulated, the deal arrangers revised their initial yield guidance of 7.75% to 7.5% plus/minus 5bp. The deal eventually priced at the tight end at 7.45%. The lead managers were Citi, DBS, Deutsche Bank, HSBC and Royal Bank of Scotland.
Indosat last sold bonds in 2005 when it priced a $250 million seven-year deal. Given the short maturity date of that issue, it was not used as a benchmark for investors. Instead the Adaro 2019 bonds were used as the comparable notes for this paper.
At the time Indosat announced the current deal, the Adaro 2019s were trading at a yield of 7%. In terms of pricing, the lead managers took into account the curve extension through an Adaro 2020, which would have pushed the yield to 7.625%. Including a new issue premium, they estimated that a new Adaro tenure could comfortably come to market at around the 7.75% mark. Hence, the 7.75% initial guidance for the Indosat deal.
Asian buyers accounted for 40% of the order amount, while US accounts made up 33%. European accounts took the remainder.
In terms of allocation, 70% of the bonds were sold to fund managers and asset managers, which were the real money accounts that also drove the swell in the order book immediately after the announcement. Private banks bought 15% of the bonds, insurance and pension funds 8%, banks 5% and other types of investors 2%.
"The orders that came in were very sizeable," said one banker, "and we were not able to allocate a lot of the bonds to the accounts."
This under-allocation resulted in a good secondary market performance after pricing. The markets had also rallied in the US on Thursday and Asian markets gained on Friday on the back of a more constructive backdrop. The Indosat bonds were last seen trading on the screen at 104bp.