PGN prices high yield bond

Indonesian corporate struggles with difficult markets and ambitious pricing targets.

A few days later than expected, Indonesian gas T&D company, Perusahaan Gas Negara (PGN) priced a downsized $125 million high yield bond on Friday. The 10p7 issue was led by the company's house bank Credit Suisse First Boston and follows a debut $150 million in September last year.

Pricing came at 98% on a coupon of 7.5% to yield 7.875% or 480bp over Treasuries. Fees were 1.5%.

The deal was reduced from an initial size of $150 million to $125 million and closed marginally oversubscribed. Had the company been willing to offer investors an 8% coupon, observers say the book would have closed a number of times covered.

However, in a repeat of what happened last September, the company decided to forsake size to get the pricing it wanted. At issue, the new bond offered a 9bp premium to the outstanding deal, which is five months shorter.

On Friday, this 7.5% 2013 bond puttable in 2010 was bid at 98.5% to yield 7.875% or 471bp over Treasuries. One of the major hurdles PGN faced was its lack of value relative to cellular operators Indosat and Excelcomindo, both of which have the same B2/B+ rating as PGN.

For example, Indosat's November 2010 bond is currently bid at about 7.5% or 450bp over Treasuries and Excelcomindo's January 2009 bond at a much wider 8.66% or 566bp over Treasuries. PGN was also not helped by the Excelcomindo's secondary market trading performance in the month since its launch. On Friday it was bid around the 97.38% level just over two points down from launch at 99.495%.

Observers report participation by 31 accounts in PGN's new deal, with a geographical split that saw 67% placed into Asia (of which just over half went to Indonesia), 25% to the US and 8% to Europe. By investor type, banks took 66%, funds 21%, insurance companies 9% and retail 4%.

Proceeds are being used to fund the company's $1.43 billion capex plan out to 2007. Prior to the new issue, the company is already said to have funded 58% of the total and is currently in negotiations with the World Bank for a further $80 million to $100 million. This will leave just $200 million to $250 million to fund over the next three years, some of which the company says will come from free cash flow.

Like many utilities with transparent cashflows, PGN can afford to be relatively leveraged and has a debt to capitalization ratio of 59% and a debt to EBITDA ratio of 4.2 times. Korea's single A-rated Kogas, for example, also reports high ratios, with a debt to capitalization of 67% and debt to EBITDA of 5.3 times. Under its ADB covenants, PGN cannot exceed debt to capitalization of 67%.

The funding will help PGN double its contracted gas supply by 2007 and triple its asset base. Capex is split $1.2 billion in new transmission pipelines, $177 million in new distribution pipelines and $46 million to expand existing distribution pipelines.

The 61% government-owned entity is the country's major gas distributor and a direct play on the Indonesian growth forecasts. At the time of its IPO in October, it had 2,547KM of gas pipelines serving six separate distribution networks via three transmission pipelines. It has also just finished a Grissik to Singapore pipeline, which is expected to ship $9 billion in natural gas to the City State over a 22-year period.