Perusahaan Listrik Negara (PLN), Indonesia's state-owned electricity company, has raised $750 million with 10-year bonds, pricing the issue on Monday afternoon (New York time).
The deal was launched on the same day that another sub-investment grade borrower, Indonesian retailer Matahari, completed its $200 million debt exchange and issue of new high-yield bonds. The success of both transactions suggests that the capital markets might, at last, be re-opening for Asian companies with low credit ratings. The last US dollar public offering by a regional sub-investment grade corporate was a $350 million issue from SMIC, a Philippine conglomerate, in July 2008.
PLN's senior unsecured notes were launched out of its wholly owned subsidiary Majapahit Holding BV, a special purpose vehicle registered in the Netherlands, and are unconditionally and irrecoverably guaranteed by PLN.
They pay a semi-annual coupon of 8%, and were re-offered to investors at 99.155 to yield 8.125% to a maturity date of August 7, 2019. The issue will be listed in Singapore.
The pricing was at the tight end of the revised official guidance, which began at a yield range of 8.25%-to-8.5%. Market convention dictates that high-yield bonds are analysed and compared on a straightforward gross redemption yield basis, unlike investment-grade bonds where the yield spread over government paper or swap levels are the key numbers.
But, coincidently or not, PLN achieved a sub-450bp spread over the benchmark US Treasury bond yield, that is, 449.6bp to be exact. More relevant for assessing an appropriate valuation was the yield compared with existing (albeit illiquid) PLN dollar bonds and the recent Indonesia 10-year issue. The initial marketing range of 8.25%-8.5% indicated a spread of 150bp-175bp over the sovereign paper, and the final terms meant the deal came at 137.5bp, and was offered through the interpolated secondary curve made up of PLN's 2016, 2017 and 2037 bonds.
Immediately after the issue was free to trade in the afternoon in New York, it was offered at par and later moved stronger to 101. A dealer in Asia said he saw them trading as high as 102 yesterday morning. Another effect was to galvanise activity in PLN's other bonds, with dealers crossing over switches from the new issue into the seasoned paper, while spreads on Indonesia's bonds narrowed more than 20bp.
A rival banker reckoned the deal was priced too cheaply, which he said, "wasn't helped by initial guidance that was too generous". The starting level, he argued, should have been a yield of 8.125%-8.375%.
Certainly, however, the joint lead managers and bookrunners, Barclays Capital and UBS, can be applauded for their swift execution. The issue was launched and priced within 10 hours, and the leads received strong demand during the first two hours of simultaneous solicitations to investors in Asia and Europe on Monday, according to sources familiar with the transaction. Investors had to decide independently on the merits of the deal, rather than ride the coat-tails of any momentum generated earlier and elsewhere. They had been primed by a global non-deal roadshow earlier this year.
By the time the book closed and US investors, who were able to buy the issue because it has Rule 144A status, had put in their limits and orders, demand had reached $8.6 billion from 310 accounts -- more than 11 times the issue size.
The initial allocation saw 44% placed in Asia and 28% each in Europe and the US. Asset managers took up more than half or 52%, while banks bought 25%, insurance companies and pension funds 12%, retail 8% and the remaining 3% to others.
Sources said that PLN was clear that despite the heavy demand it would cap the deal size at $750 million. The company was keen to keep its indebtedness well below the threshold set by a fixed charge (annual income divided by interest payments) covenant contained in the offer document.
PLN had already been embarrassed when it asked investors two weeks ago to waive a covenant attached to previously issued bonds that it had already breached. Due to a legal oversight, lawyers acting for PLN had to pay $5 million in compensation to holders of its 2011 and 2016 deals issued through its Majapahit SPV because it had raised additional cash from the same SPV, despite a covenant restricting it from doing so. UBS had egg on its face too, because it had arranged not only the two earlier deals, but also the offending tranche in 2007.
The new notes are rated Ba3 (positive) by Moody's and the equivalent BB- (but stable only) by Standard and Poor's. The net proceeds from the bond offering will be used to fund PLN's capital expenditure requirements in connection with transmission and distribution construction projects and for general corporate purposes.
In a note released on August 3, Moody's analyst Jennifer Wong wrote that PLN's rating is "closely linked to the [Indonesian] government's credit quality". PLN in 100% owned by the Ministry of State-Owned Enterprises (MSOE), and has "strategic importance as Indonesia's only vertically integrated electricity utility, as well as the government subsidies to ensure its financial viability and operational soundness".
So any future upgrade or downgrade in the sovereign rating would lead to a similar move on PLN's rating; and a downgrade would also follow any partial privatisation of PLN or if the government stopped providing subsidy support -- neither of which are likely, according to Moody's.
Moody's last acted on PLN on June 11 when the outlook on the company's Ba3 corporate family rating and Ba3 senior unsecured ratings was changed to positive from stable, in line with the agency's more sanguine view of the sovereign credit.
PLN has a generation capacity of over 25,000MW. It is a monopoly operator of transmission and distribution networks in Indonesia, and controls all public electricity infrastructure and power generation.