IOI Corp launches first international bond

Malaysian palm oil and property company launches first straight dollar bond deal.

IOI Corporation is to launch its first dollar bond deal this week with the help of book runners Citigroup and Barclays Capital. The deal has an initial size of $350million although given the strength of demand for recent Asian issues such as the China Merchants or Shinhan Bank trades, this size looks easily covered. The deal will have a ten-year maturity and count as a senior unsecured credit.

Road shows for the deal will start this week with the teams in Singapore on Thursday, Hong Kong on Friday and the London on Monday. The Reg-S issue will then launch and price next week.

The deal has been given a split rating of A3 by Moody's and BBB+ by S&P, hitting the sovereign ceiling with Moody's and one notch lower than S&P which rates Malaysia A-.

"The ratings of IOI benefit from the group's above-average financial profile, favorable plantation resource profile, highly competitive cost position, and synergy between key business segments," said Standard & Poor's credit analyst Cheow Hon Lee. "Standard & Poor's expects IOI to focus on organic growth and the consolidation of its various acquisitions, instead of sustaining growth through new acquisitions."

However, S&P also stressed in its rating guide that it was concerned with the cyclicality of the palm oil business stating that 'each of the IOI business segments is cyclical with cash flows subject to volatile price swings and demand risk. CPO prices have been highly volatile and are affected by weather conditions, import restrictions, and consumer preferences.'

However, the company is an integrated palm oil and property company that has been expanding fast in recent years. 69% of its revenues come from palm oil and 31% from property. In particular it has followed a strategy of acquiring downstream refining capacity to hedge the cyclicality of the upstream palm oil plantation business. In 2003 it acquired the Netherlands based Loders Croklaan Group and announced plans to build a new refinery in Rotterdam.

According to Dato Yeo Haw, the group executive director of IOI Group who runs the firm's finances, this strategy has paid off. "Things are going well and we should have a record year this year, pre-tax," he says. "If you look at our individual businesses they are quite cyclical, but taken as a whole it is quite well hedged. Our volatility is quite low compared to our peers and we continue to grow against palm oil cyclicality."

The purchase of Loders Croklaan was financed with a Eur230 million loan of which Eur210 million remains. This equates to about $300 million and thus the proceeds from the bond deal will be used to refinance this loan.

The company has decided not to go to the euro markets but stick to dollars, in what can only be seen as a vote of no confidence in the ability of Asian issuers to tap the euro bond market. "The dollar market is more liquid and we can easily swap the proceeds [into euros]," says Yeo.

Yeo says that the company has no plans at present to undertake any more acquisitions, having spent some RM2.7 billion ($710 million) on a variety of acquisitions in the past five years.

In terms of pricing, investors are likely to look at comparable issues such as the ten year A2/A- Petronas bonds due 2015 which are bid at 80bps over Treasuries. Also relevant are the Baa1/BBB+ MISC issue due in 2014, which is bid at 83bps over Treasuries and the A3/A- issue by Telecom Malaysia, due in 2014, also bid at 83bps over Treasuries. However, these deals have the halo effect of significant government ownership, whereas IOI Corporation is a private sector play.

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