Lippo Karawaci: tap-dancing to bond success

The Indonesian developer returned to the bond markets this week, after an earlier debt exchange proved a flop. That previous failure turned out to be a blessing.

Lippo Karawaci returned to the bond markets this week, after being forced to pull a debt exchange earlier this year due to tepid demand. That earlier failure was fortuitous — the company’s $260 million bond tap proved much cheaper than it had previously hoped.

The Indonesian property developer tried to pull off an ambitious liability management exercise at the start of the year, asking investors to accept a new 2023 bond in exchange for its outstanding $200 million 7% May 2019 issue — and seeking consent from investors in another pair of outstanding bonds to go ahead with the plan.

Investors ultimately backed away from the deal, despite Lippo offering increasingly higher yields for the new bond. But after waiting a few months — and enjoying the benefit of a tightening curve for Indonesian corporations — Lippo came back for a second attempt this week.

The company may feel lucky the original plan fell flat.

Lippo approached investors on Wednesday with an offer to tap its outstanding $150m 7% April 2022 issue. Instead of launching an exchangeable offer at the same time, Lippo’s plan this time was more simple: it would use the funds to redeem the old 2019 bond, which is callable on September 6.

Lippo found a remarkably different reception this time around. Investors placed orders worth more than $1.25 billion for the tap, which ended up being sized at $260 million, giving the 2022 bond a combined size of $410 million.

Perhaps more importantly, the company closed the tap at a cash price of 103.75% of par, offering a yield to maturity of 6.2%, and a yield-to-worst of 5.85%, according to a banker familiar with the deal. That compared with the 9% yield the company offered when trying to issue a new bond in February.

“It was a little bit of a blessing in disguise,” said the banker.

An eye on leverage

It may have helped that Lippo was not asking for any new financing. The vast majority of the proceeds of its $260m fund-raising this week will go to redeeming the 2019 note. Last time, the company was hoping to raise an extra $100 million to expand its hospitals business.

“The last time they came to the market, there was a sense that any further debt-raising would not go down well, especially if the use of those proceeds was for capital expenditure,” said Lakshmanan R, a research analyst at CreditSights in Singapore.

Lippo had a gross leverage of 5.7 times in March, on a last-12-month basis, according to Lakshmanan. There is still little appetite among investors to help the company add to that number, he said.

Bankers and investors tend to have short attention spans. Focus will now naturally turn to the next deals, and the chances of more supply from Indonesian corporations. At least one other Indonesian company is planning to launch its own tap soon, a banker said.

But bankers do not expect a major surge in supply from the country. This will only help those that do come. The increasing appetite for emerging markets assets since Lippo’s January exchange offer — helped by Brexit and uncertainty about the US election — appears to be a big part of what helped Lippo turn failure into success.

“It has worked out well for them, mainly because yields for Indonesian corporates have tightened over the last few months,” said Lakshmanan. “There has been a chase for yield amid the negative rate environment globally, and we’re also seeing a lot more significant emerging market flows into Asia post-Brexit.”

Citi, Deutsche Bank and UBS were the joint global coordinators of the tap, alongside bookrunners Bank of America Merill Lynch and Credit Suisse.

These banks approached investors with initial price guidance of 102.5% on a cash price basis, equivalent to a yield-to-maturity of 6.46% and a yield-to-worst of 6.22%. They then cut guidance to between 103.5% and 103.75%, before pricing the deal at the top of the cash price range.

¬ Haymarket Media Limited. All rights reserved.

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