PT Mitra brings high yield debut and swansong

An unusual high yield bond deal by an Indonesian "telecom operator".

Lead manager UBS completed a well-received $270 million bond deal for PT Mitra Global Telekomunikasi Indonesia (MGTI) on Tuesday. The three-tranche Reg S issue represents the first dollar bond from Indonesia since the spring and its success appears to show that the Asian yield market may be finding its feet again after a difficult six months.

Proceeds are being used to re-finance a syndication loan put in place this January to fund the acquisition of the revenue rights to KSO IV - MGTI. The latter encompasses one of five ill-starred foreign owned joint ventures established in the 1990's to roll out fixed line phone services in Indonesia. A plethora of the biggest international telecom operators lined up to take part and invest in the projects, only to pull out after the financial crisis, when the rapid depreciation of the rupiah made their debts unserviceable.

However, the current deal seems likely to be PT Mitra's first and last since MGTI's acquirer, PT Alberta Telecommunication, will cede KSO IV's rights back to PT Telkom in 2010 and is prevented from raising any more debt under the transaction's covenants package.

The deal has three tranches.

Tranche A comprises a $105 million three year issue with a straight line amortizing structure and quarterly payments, to give an average life of about two years. It was priced at par with a 7% coupon.

Tranche B comprises a $145 million six year bullet deal due 2010 with semi-annual re-payments. This was priced at par with an 8.375% coupon.

Tranche C comprises a $20 million bullet deal due January 2011, also with semi-annual payments. This was priced at par with a 9% coupon.

In total, the deal generated an order book of just over $1 billion, of which tranche A received $600 million and tranche B $400 million. Tranche C was privately placed to two investors relating to the conversion of a shareholder loan.

Bankers say tranche A was more popular because of its shorter maturity, which appealed to local accounts. The book had 50 accounts, of which 40% were from Singapore, 31% from Europe, 17% from Indonesia and 12% from Hong Kong. By investor type, asset managers took 62%, banks 22% and retail 16%.

Tranche B was also placed with 50 accounts, of which 39% came from Singapore, 29% from Europe, 19% from Indonesia and 13% from Hong Kong. By investor type, asset managers took 63%, banks 19% and retail 18%.

The B2/B+ rated deal was marketed as quasi PT Telkom exposure with an additional premium for the structured nature of the transaction. As such there are two outstanding benchmarks.

PT Telkom's main domestic rival, B2/B+ rated PT Indosat, has a 7.75% November 2010 call bond outstanding, with a call option in 2008. This was trading at 7.29% at the time of pricing.

Further down the credit curve, although it shares the same B2/B+ rating, is the country's third cellular operator, PT Excelcomindo. The latter has an 8% January 2009 bond outstanding, with a call option in 2007. This was trading yesterday at 8.45%.

Justification for pitching MGTI in this way derives from the fact that revenues generated by KSO IV are paid by PT Telkom, which still operates the network. If KSO IV fails to generate enough revenue to cover interest payments,, PT Telkom must make up the shortfall and if it fails to do so, this will trigger a cross default across all of its own debt.

Analysts explain that Alberta Telecommunications stepped in to buy KSO IV's revenue rights after PT Telkom failed to agree a price with the original shareholders, led by PT Indosat, Telstra, NTT, Itochu, Sumitomo and Widya Duta Infotel. The existing shareholding group baulked at Telkom's desire to pay them out on a staggered basis.

Alberta Telecommunications, on the other hand, was willing to pay cash up front. The group is run by well-known local businessman Edwin Soeryadjaya.

What Alberta gained was first claim on revenues to KSO IV, but no responsibilities over cash flow, operating expenses or capex. These remain with PT Telkom, which is incentivized to maintain and expand the network. For example, since KSO IV transferred ownership rights Alberta, Telkom has installed about 100,000 new lines of which it receives all revenue rights itself.

Current revenues from KSO IV cover payments to MGTI rooughly three times over. Interest and principal on the bond will be paid from a special revenue account held by a Netherlands-based trustee. This will have a separate interest and principal account and a special reserve account holding three months worth of interest payments, funded from the bond's proceeds.

Alberta funded its purchase of MGTI with a $215 million amortising syndicated loan arranged by DBS and Bank Mandiri. The facility had a tenor of five years and a three-month grace period. It was priced with an all-in margin of 655bp.