PT Chandra pulls a high yield cracker

Indonesia's largest petrochemical company demonstrates just how far high yield spreads have compressed.

PT Chandra Asri Petrochemical returned to the international bond markets for the first time in seven years on Tuesday with a $300 million deal, which underlined just how much high yield spreads have compressed in recent years.

When the group last came to market in October 2010, its five-year deal carried a 12.875% coupon on a B2/B+ rating.

This time round, it has more than halved that cost to 5.1%, although there is a structural difference between the old and new deal since the latest offering has been issued in its own name rather than through a Singapore-registered financing vehicle.

Over the past seven years, Chandra Asri has also been able to improve its ratings profile and today has a higher Ba3 rating from Moody’s, the same rating from S&P and a new BB- rating from Fitch. 

The other major change since 2010 concerns oil prices, the main feedstock for the group’s naptha cracker. Back then, prices were almost double their current level and on a rising trend, making life very difficult for petroleum based chemical producers in Asia and Europe.

This October, they have been on a rising trend again, jumping nearly 30% in four months to a current level around the $54 mark. Bullish sentiment is being driven by expectations of supply cuts.

Last weekend, Saudi Arabia’s crown prince, Mohammed bin Salman, reiterated the kingdom’s support for a production curb at the forthcoming OPEC meeting on November 30.

However, this factor did not appear to deter high yield investors who piled into the order book, which peaked around the $3.4 billion mark and closed at $2.2 billion with participations from 189 accounts.

One investor told FinanceAsia, “The oil market has rallied pretty significantly in recent months because of growing expectations the cartel will keep withholding supplies. Apart from a change in sentiment towards oil prices, Chandra Asri’s overall profitability has been pretty robust.”

In the first six months of 2017, net profit rose 32% year-on-year to $174.2 million.

The investor also added that, "generally speaking foreign investors find value in Indonesia credits after S&P lifted its sovereign rating.”

They are also likely to have been attracted by the positive momentum driving Chandra Asri’s upwards-rating cycle, with S&P the outlier in that regard.

For example, Moody’s upgraded Chandra Asri from B1 to Ba3 in August, citing its higher margins, improved cash flow, sustainable liquidity profile and debt reduction - pro forma debt/Ebitda ratio of 1.2 times including the new deal.

The group’s cash position has improved thanks to a $378 million rights issue, which was issued to meet the freefloat requirements of the Jakarta Stock Exchange.

Proceeds from that deal and the new bond offering are being used to fund $375 million capex in 2018 and $513 million in 2019. Part of the proceeds will be used for a feasibility study for a second naptha cracker plant.

Moody’s has said it may upgrade the company again if it can maintain positive free cash flow throughout the 2018/19 capex cycle.

S&P, meanwhile, has capped Chandra Asri’s credit rating at B+ mainly because of an ongoing restructuring at its parent, Barito Pacific. Thanks to the merger of two Indonesian firms, Chandra Asri is now 70% owned by Barito Pacific Group and Thailand’s SCG Chemicals.

Fair value

Investors are also likely to have warmed to the deal because it offers some diversity within Indonesia’s high yield spectrum even though it is a quasi-commodity play.

As a result, the leads were able to narrow pricing on the Reg S/144a deal from the 5.5% area to 5.1%. Final pricing for a seven-year non-call four offering was fixed at 99.126%.

In terms of fair value, bankers cited other double B rated Indonesian names. These included Ba2/BB- rated property developer Pakuwon Jati. It has a $250 million February 2024 bond, which was trading around the 4.675% mark on Tuesday.

Meanwhile B1/BB- rated Sritex has a June 2021 bond, which yields about 4.894%.

Lucror Analytics assigned a fair value of 4.75%.

During secondary market trading on Tuesday, the bond traded in to a cash price of 99.30 to yield 5.07%, or 3bp tighter than its reoffer, according to market data.

Despite taking the 144A route, US investors represented only 12% of the entire deal. Investors in Asia and EMEA took 60% and 28% respectively. Fund managers/asset managers took 72%, while private banks and pensions/insurance firms/ corporates bought 15% and 9%, respectively. The remaining 4% went into banks/others.

Joint global coordinators were Citi, DBS and HSBC, while Deutsche Bank and Mandiri Securitas were joint bookrunners.


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