Indonesian property developer Bumi Serpong Damai sold its first dollar-denominated bond but credit research firm Lucror Analytics is questioning the legality of the instrument.
Bumi Serpong Damai, the largest property developer in Indonesia in terms of presales, raised a $225 million five-year note that is callable in year three on Monday evening. The Reg S-only bond, which had a target size of up to $250 million, priced at 6.75%, 25bp tighter than its initial price guidance area, according to a source close to the deal.
Although the transaction — issued by wholly-owned subsidiary Singaporean incorporated Global Prime Capital — managed to price, Lucror Analytics in a research note released Monday afternoon Hong Kong time said that the dollar notes, guaranteed by Bumi Serpong Damai, are “un-investable and should be avoided.”
Lucror's argument stems from the fact that the Widjaja family who control Sinar Mas Land, which effectively owns 61% of the Indonesian developer, previously challenged the legality of a guarantee structure similar to that now being proposed for Bumi Serpong Damai's notes and failed.
"Credit risk is a function of an issuer's ability and willingness to pay,” Charles Macgregor, head of Asia at Lucror Analytics, said in the report. “The former is meaningless without the latter.”
Macgregor said investors should pay special attention to pages 60-61 of the bond issuer's prospectus.
Those two pages highlight how Indonesia’s pulp and paper manufacturers Indah Kiat and Lontar Papyrus — both of which are owned by the Widjaja family — each had $500 million-worth of bonds invalidated by the Indonesian Supreme Court.
In the case of Indah Kiat, the instrument was nullified by the Supreme Court in June 2006 and again in September 2011 after the court in 2008 annulled the initial 2006 decision. For Lontar Papyrus, it was March 2009.
Both of the debt instruments, issued through offshore offering structures, were declared invalid because the parent company was acting as both debtor and guarantor of the same debt, which is illegal according to Indonesian law.
The courts also reasoned that the contracts made in relation to the Indah Kiat notes were signed without any legal cause and so did not meet the provision of Article 1320 of the Indonesian Civil Code, which requires a legal cause as one of the elements for a valid agreement.
The Indonesian court further ruled that the establishment of Indah Kiat International Finance Company, the issuing entity, was unlawful as its intent was to avoid Indonesian withholding taxes.
Lontar Papyrus’s notes — issued by an offshore entity named APP International Finance Company — were nullified for similar reasons and the Indonesian Supreme Court’s refusal to grant a civil review of the lower court’s decision in 2009 implies that the verdict is now final.
Lucror Analytics fears that Bumi Serpong Damai’s debt instruments could end up the same way as those of Indah Kiat and Lontar Papyrus, given the ever-changing rulings made by the Indonesian Supreme Court on offshore bond issuances and their structures.
“[This shows how] both cases highlight there is no legal precedent in Indonesia and there are some truly bewildering decisions,” Macgregor told FinanceAsia, adding that the Widjaja family had once upon a time defaulted on $14 billion worth of debt back in 2001.
“I am not sure why any rational investor would lend to this family again but seemingly there are new investors all the time seeking diversification away from Chinese property, where, prior to Kaisa, there had been no defaults,” he said.
Rating agencies Moody’s and Fitch — which have rated Bumi Serpong Damai’s new bonds Ba3 and BB- respectively — failed to flag this issue in their credit rating reports.
Bumi Serpong Damai’s note ranks pari passu with the company and its key subsidiaries’s senior unsecured obligations.
Subsidiaries that together account for 90% of Bumi Serpong Damai's consolidated Ebitda will guarantee the bond. The remaining material subsidiaries, including its listed subsidiary Duta Pertiwi, will be restricted subsidiaries and will be subject to restrictive covenants that prevent any meaningful subordination of potential bond investors, Fitch said in a report on April 15.
Bumi Serpong Damai is the third Indonesian issuer to sell a dollar-denominated high-yield offering so far this year.
Local tower companies Solusi Tunas Pratama and Tower Bersama Infrastructure raised dollar junk bonds in February, with the former pricing a $300 million five-year non-call three note and the latter selling $350 million-worth of seven-year non-call five paper, according to Dealogic data.
The funds raised from Bumi Serpong Damai’s bond will be used for capital expenditure purposes, namely for the development of new properties and infrastructure, land bank acquisitions, and general corporate purposes.
The developer received an orderbook in excess of $750 million from over 70 accounts, with Asian investors subscribing to 85% of the notes, according to a source familiar with the matter.
In 2014, Bumi Serpong Damai sold more than $500 million worth of properties, and Fitch expects presales to increase by a compounded annual growth rate of 15% to 20% through 2017.
The developer has around 45 million square metres ready for development, which provides the company with more than a decade of development potential, the rating agency said.
Citi was the joint global coordinator and bookrunner of the transaction. The other bookrunner was UBS.