2003: Sars attacks

Severe acute respiratory syndrome, to give Sars its full name, spread around the region in early 2003, leading to deals being called off and bankers quarantined. With the war in Iraq and a consumer credit bust in Korea, confidence looked for a time to be irreparably damaged.

But sentiment turned over the summer and deals soon started to flow once more. The Thai and Indonesian privatisation programmes restarted. Even Chunghwa Telecom finally managed a successful deal – surely a sign that anything was possible. The international bond markets welcomed a record from Hong Kong stalwart Hutchison Whampoa, before Asia Pulp and Paper threw up another nasty surprise towards the end of the year.

IFR Asia 302 – April 19, 2003

Sars attacks

Banks in Asia have been making their adjustments to the severe acute respiratory syndrome (Sars) outbreak, sometimes grudgingly, sometimes with humour but all with a growing sense that Sars has to somehow be worked into normal life.

HSBC, for example, has worked through six infections, one quarantine and has split its dealing room at its main Hong Kong headquarters onto two floors. While there is a tendency in banking circles to make cracks about the disease and some of the more panicked reactions to it in the region, one of HSBC’s employees is critically ill with Sars. The bank and its staff are completely serious about the disease.

In debt, Sars has altered several issuers’ offshore bond plans. The highest-profile casualty was the Hong Kong Airport Authority (HKAA), which pulled a US$300m 10-year maiden bond issue earlier this month.

Given that the main motivation for the issue was to raise the profile of the HKAA in the offshore markets, it hardly made sense to market the deal during a steep Sars-related slump in air traffic, said bankers at mandated leads Goldman Sachs and HSBC. Roadshows in Hong Kong were also canned for Bank Mandiri’s US$300m five-year senior bond that priced on April 11, but an attractive coupon ensured a strong reception despite the limited marketing. It drew US$1bn in orders.

That transaction underlined that offshore capital markets remain open for those borrowers whose businesses have not been materially affected by Sars. Even Hong Kong-based firms have raised money, although the bellwether credit Hutchison Whampoa – which tapped a 10-year bond for US$1bn in late March – is perhaps not representative of the chances of most.

In Hong Kong’s local capital markets, deal flow has remained steady. Just last week Hongkong Land raised HK$1.5bn from a three-year bond at aggressive levels just days after Moody’s changed the outlook on several Hong Kong property companies to negative from stable. If Sars continues for long, the disease will hit property companies the hardest. Shopping malls are deserted and rental income may wither as demand for office and retail space dries up.

Sars has likewise ravaged the business of Hong Kong’s MTR Corp and Kowloon-Canton Railway Corp (KCRC). The latter, however, is pressing ahead with a HK$1bn bond via HSBC despite seeing passenger numbers drop sharply along its main line from Kowloon to the Chinese border of Guangdong province, where Sars began.

Equity bankers have taken to using videoconferencing and the internet to market deals in so-called “virtual roadshows”. It is a fancy way to put it – others describe it as glorified tele-sales.

Nevertheless it is keeping deals on track. The SingPost IPO will see the launch of a virtual roadshow on April 22, and the KCC US$30m GDR offering was marketed via videoconference, telephone and internet.

On the personnel side, several banks have dispatched key bond trading staff to other locations such as Tokyo, Sydney and as far afield as Europe and the US. Others have imposed quarantine restrictions on bankers travelling to other offices from the worst affected areas such as Hong Kong. Bankers from CSFB, who travelled from Hong Kong to Singapore last week, were being forced to spend 10 days in a hotel in Singapore before being given the all-clear to enter the bank’s Singapore office.

At least one asset-backed securitisation is on hold because rating agency analysts are refusing to fly into Singapore where they need to inspect assets for a deal to proceed.

Most banks are making staff go into a 10-day quarantine even if they coming into, for example, Hong Kong and Singapore. Some privately grumble that the measure makes no sense – why quarantine coming into Hong Kong? – but do so quietly, as there is a growing sense of political correctness surrounding Sars.

The deal flow continues. Bankers muddle on. They complain: first a three-year equity slump, then a prolonged Middle East war overhang, and now Sars. “I wish I could say there is a greater master plan [for dealing with Sars]. But it’s not like I have a manual on policies for pestilence and epidemic,” said one Hong Kong-based banker. Make that a manual for war, pestilence, terrorism and recession.

IFR Asia 312 – June 28, 2003

SingTel and lenders at loggerheads over C2C

Singapore Telecommunications’ refusal to lend more financial support to its 59.5%-owned subsidiary C2C could increase the cost of funds for other government-linked companies in Singapore. Bankers said that SingTel’s decision may make lenders more wary about lending to such companies on name-recognition alone, with higher prices and tighter structures the likely consequence.

In an announcement last week SingTel said that it has notified C2C, an undersea cable company, that it has cancelled its commitment under a US$200m convertible loan agreement based on legal advice on its rights and obligations. The convertible loan agreement came in conjunction with a US$650m secured financing facility extended to C2C by banks in December 2001 and lenders have called on SingTel to disburse the remaining US$164m, arguing that it has an obligation to do so.

“We are very disappointed with this announcement. The whole deal was marketed with SingTel’s majority shareholding in mind,” said a banker involved. “In fact, one senior SingTel official was also present during the deal’s roadshows which dwelled on the strategic importance of C2C to SingTel.”

C2C was first forced to the negotiating table in February this year, when lower-than-expected bandwidth sales meant that C2C had to acknowledge that it had not met fourth quarter 2002 revenue targets as required under its US$650m facility. The outstanding amount under the facility is now US$592m.

Subsequently, SingTel wrote down its investment in C2C and the company is rumoured to have not attended any discussions between the lenders and C2C since doing so.

Some ripple effects are already being felt by Singapore Inc. For instance, despite a success in syndication, state-owned company Singapore Technologies’ finance arm ST Treasury Services’ US$300m five-year loan did not get commitments from any of the banks that were in the C2C loan, including the highly liquid Chinese banks who would normally have been expected to take part.

“Going forward, deals will be valued on their merits unlike the earlier practice of name recognition-lending, meaning banks may either insist on higher pricing, direct guarantees or ask for tighter structuring,” said another banker.

IFR Asia 333 – November 22, 2003

New twist for APP

Indicative prices for the debt of Asia Pulp & Paper primary Indonesian operating companies’ (Piocs) plunged last week on news that the companies’ lawyer Hotman Paris Hutapea had argued in court that some of the bonds were ultra vires, or null and void.

Even though many believe that Hotman’s assertion is specious, creditors still fear that the Indonesian court might accept his claim.

“The Indonesian court has so often accepted some outrageous arguments from the lawyers of debtors, it would be no surprise for this to happen,” said one distressed-debt dealer.

Hotman made the assertion in defence of a move by three US bond investors who have petitioned the Indonesian court to allow foreclosure on collateral securing APP International’s 05 notes (guaranteed by Lontar Papyrus Pulp & Paper Industry), and the 2002 and the 2006 Indah Kiat Finance notes, which are guaranteed by Indah Kiat Pulp & Paper. The petition seeking the attachment of assets was filed by Oaktree Capital Management, Gramercy Advisers and General Electric Capital Corp.

Copies of the defence filed by the APP legal team were not available, so the reasons for his assertions that the bonds are ultra vires aren’t clear. But lawyers in Indonesia said that it appears Hotman argued that the bonds were illegal under Indonesian law because they were specifically structured to include guarantees that would force the guarantors to repay obligations they shouldn’t have been responsible for.

Indicative prices for Indah Kiat’s 2002 and 2006 notes plunged from an offered price of around 47 before the news to a bid/offer of 41/43 afterwards. Pindo Deli’s bonds were also hard hit by the news with the issue bid at 21 from around 26 earlier, while Tjiwi Kimia bonds dropped to a bid price of 33 from 36.

However, few, if any, transactions took place last week with traders saying that most bondholders believe that the debacle will get sorted out and that the restructuring will move forward.

“This is just another

phase of the APP saga that

we have to go through. We have been through so many ups and down with APP in

the last two years; there is always drama with these guys but the fact is that there has also been a lot of progress. This deal will get done,” said one trader.