Easing covenants on an unrated Indonesian borrower would be a tough sell at any time, let alone in a high-yield market that had been closed for six months. For reopening the market with a complex refinancing, Cikarang Listrindo’s US$500m bond is IFR Asia’s Indonesian Capital Markets Deal of the Year.
The US$500m seven-year non-call four high-yield bond for Indonesian power company Cikarang Listrindo, launched in conjunction with a refinancing of its existing notes, showed just what was possible in Asia’s high-yield market.
Despite some early opposition from investors, the deal attracted a staggering order book of US$4.3bn and priced at an impressively tight 6.95%, effectively re-opening Asia’s high-yield market and triggering a complete re-assessment of investors’ risk appetite.
The deal’s success belies the challenges involved. When Cikarang announced in February that it wanted to tap the market for a US$500m Reg S/144a trade that included a concurrent tender offer and consent solicitation to ease covenants, the idea hardly seemed plausible. The eurozone crisis was acute and the Asian high-yield market had been shut since the previous August.
However, the issuer – along with bookrunners Barclays Capital and Credit Suisse – called the market correctly. With huge sums flowing into high-yield funds and an uptick in sentiment after the Greek Parliament had passed austerity measures, the time was right.
The deal was far from straightforward because it comprised a tender offer on the issuer’s US$300m 9.25% senior notes due 2015 and a new bond issue, partly to fund capital expenditure, with less restrictive covenants. The two were being done concurrently to allow Cikarang to use some of the proceeds from the new bonds to fund the buyback.
Investors were unhappy about several aspects of the deal. They did not like the new issue’s looser covenants, or the fact that only 51% approval (as opposed to 75%) was required to ease them. Most of all, they were upset that Cikarang had set a tender price of 110.75 for early-bird responders and 107.5 for those that responded later, both well below the 113.00 make-whole price. Some investors even threatened to boycott the tender.
Given that the tender process would leave Cikarang exposed to up to 20 days of market risk in an extremely volatile market, the company was desperate to get the deal done quickly.
So, after a week of roadshows in Asia, Europe and the US, the banks kicked off a strategy aimed at getting investors in quickly. Early deadline and settlement options were included so that investors who tendered early got priority allocations on the new issue.
The approach worked with 93.33% of the outstanding notes tendered ahead of the early deadline of February 10, giving Cikarang the momentum it needed to complete the new issue three days later.
Initial price guidance was 7.50%, but it was clear the bond was a going to be a blowout when the order book had swelled to US$3.5bn when London opened. Pricing guidance was tightened twice until the deal finally priced at 6.95%, the lowest US dollar coupon for a privately-owned Indonesian issuer.
The credit’s defensive nature and recent upgrades from Moody’s and Fitch taking the Indonesian sovereign to investment-grade status helped fuel demand for the issue. However, the biggest driver was pent-up investor demand for yield in a low-interest-rate environment.
More than 250 accounts, 120 of them new investors, joined the deal with the US accounting for 35% of orders, Europe 27% and Asia 38%. Funds and asset managers took 67% of the deal, private banks 18%, and banks, insurers and pension funds the balance.
In secondary, the bonds hit 100.75 on the break.
Cikarang’s success showed that, after a long hiatus, demand for high-yield credits was once again strong, for the right name. A number of issues soon followed as other Asian issuers got the message, but it would be another eight months before another Indonesian company would attempt the combination of tender offer and new issue.
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