Euroweek high yield report: issuer profiles

Euroweek high yield report, July 2011

ADARO

Adaro Indonesia was the first of a host of Indonesian resource issuers who launched high-yield deals between October 2009 and September 2010.

Its US$800 million Regulation S/Rule 144a deal was considered a major success. Having been upsized from a planned US$500 million, its final size would be bigger than any of the comparable deals from Buma, Bumi Resources, Indika Energy or Berau Coal that would follow it over the next year, with its US$5.75 billion order book also by far the largest of them. And it did so with the longest tenor, too: a 10-year non-call five transaction, paying just 7.625%, revised down from a target of 8%.

Part of the reason for these terms is that Adaro is rated better than any of its peers, with a Ba1/BB+ (Fitch) rating at the time of the launch. By comparison Bumi was BB, Buma BB- and Indika and Berau B+ at the time of their launches. Most importantly, Adaro’s rating was, at that time, higher than the Indonesian sovereign itself (though it has since caught up): ownership arrangements allow Adaro to pierce the sovereign ceiling.

The deal, led by Credit Suisse, DBS and UBS, clearly illustrated the post-crisis appetite for Asian high yield paper, at a time when many other global markets were still mired in recovery and reconstruction. It was mainly sold outside Asia, where investors were hungry for emerging market yield in a name they could trust not to fold: 39% of the deal is believed to have gone to the US and 35% to Europe, with just 26% to Asia. The deal was the biggest 10-year corporate borrowing from Indonesia.

Another reason the bond did so well was that it followed a US$500 million five-year revolving loan for parent Adaro Energy that had been allocated just weeks earlier.

By March this year, the Adaro bonds were trading at over 110, giving an indication of how successful the credit would be if it chose to issue again amid what is an even brighter outlook for Indonesia. Indeed, market rumour suggests it may well return to the international debt markets this year.

AGILE

Agile Property Holdings is, like Country Garden, a high yield funding veteran among Chinese real estate issuers. But it has been striking for its absence from the market in the last 12 months.

The last high yield bond from Agile came in April 2010, with a US$650 million seven-year non-call four global led by Bank of America Merrill Lynch, Deutsche Bank, Morgan Stanley and Standard Chartered. The proceeds on that deal were used to exercise a make-whole call on a previous US$400 million of bonds due 2013, and for a consent offer to realign covenants on another round of bonds due 2016 to give it greater flexibility on a project it is developing in Hainan. It was a popular deal, six times covered from 330 accounts worldwide.

That deal followed a US$300 million seven-year non-call four Regulation S/Rule 144a global bond in November 2009. Since those deals, Agile has looked on while peers and smaller competitors have plundered both the dollar and the offshore RMB bond markets.

By March this year, market watchers had started to predict that a deal must be imminent, but instead it opted to launch a convertible bond in April. Sensing that it would get a better reception in a less crowded market – Hong Kong convertibles have been rare in 2011 – it was able to raise $500 million in an upsized deal through Morgan Stanley, Standard Chartered and HSBC.

The deal came with a high conversion premium of 40% and a coupon (and yield to maturity) of 4%. The bond has a five year tenor, non callable for three years, and callable thereafter if a 130% hurdle is reached for 20 out of 30 consecutive trading days. The bond ranks pari passu with the two previous high yield bonds from Agile described above.

One reason investors like Agile is because it is geographically diversified in its areas of business, with significant developments in Zhongshang, Guangzhou, Huizhou and Foshan, among other places. Many other developers have very heavy concentrations to one city, often Shanghai or Guangzhou.

PT BUKIT MAKMUR MANDIRI UTAMA (BUMA) (See also issuer roundtable)

The purchase of Buma, the second largest coal mining contractor in Indonesia, by Delta Dunia Property in 2009 involved a complicated series of transactions which included a high yield bond.

The purchase involved Northstar, a private equity fund, which formed an SPV with an investor consortium expected to hold 35-45% of Delta. Delta then acquired all Buma’s outstanding and issued shares for $240 million in cash, with a $285 million term loan facility used to fund an intercompany loan which was in turn used to repay a $240 million acquisition bridge. Alongside all that came a $315 million high yield bond.

The mixture of bond and loan funding came about because Delta Dunia couldn’t raise $600 million from either source in isolation, so had to do the two simultaneously and pari passu. The bond part involved a global roadshow including Singapore, Hong Kong, London, Los Angeles, New York, New Jersey and Boston, eventually attracting 119 investors and $900 million of total orders.

The distribution was somewhat unusual for Asian high yield with 46% of demand coming from the US – a reflection of the fact that the bond was part of a leveraged financing, which US investors are much more familiar and comfortable with than those in Asia. With their backing, the deal priced at the tight end of official guidance, at 11.75%.

One could argue the bond is particularly striking for what happened next. When Indonesia changed rules on withholding tax, it triggered a tax call within the bond’s strict and detailed covenants, causing Delta to launch a tender offer – very successfully, with near complete acceptance. The bond is also interesting in that it has now been replaced completely by bank term funding at very favourable rates:  bond-like tenor, cheaper cost of funding than the bond markets, no need to use an offshore SPV, and tax transparency. This helps to explain why the Indonesian high yield bond markets have been relatively inactive in 2011: the attraction of onshore lending.

BUMI RESOURCES

The Indonesian coal miner Bumi Resources hit the high yield bond markets twice in a year between November 2009 to September 2010, in two deals that illustrated the way market demand developed for Indonesian resource paper during that period.

The first deal raised US$300 million in seven-year non-call four funding through a Regulation S/Rule 144a issue lead managed by Credit Suisse and Deutsche Bank.

This was seen, at the time, as something of a disappointment: the deal had been marketed as US$300 to 600 million and priced at a 12% coupon, the top end of guidance. It was seen as emblematic of oversupply in the sector, following issues from Adaro, Indika and Buma, all profiled elsewhere in this section. It did raise a $600 million order book, from 90 accounts, and sold evenly worldwide. But the response was considered underwhelming.

Just under a year later, Bumi came back and started offering a US$500-700 million seven-year bond, callable at the fourth year, with price guidance of 10.75%-11%. This time, everything went the other way: the deal raised all $700 million, priced at the tight end of the range, and attracted a $3.6 billion book.

The deal – with the same leads as the earlier one, plus JP Morgan – could be seen as a representation of international attitudes towards the Indonesian story. This time Bumi was not following a slew of other coal miners into the market – just Berau Coal, three months earlier – and Indonesia itself had in the meantime moved firmly on track to be upgraded to investment grade.

It went a long way towards alleviating concerns about Bumi’s debt – at the time of the deal it had around$ 1 billion of debt due to mature in the subsequent 12 months, including convertible bonds and private loans.

Like Andaro and Indika, Bumi’s bonds have been bid up considerably in the secondary market lately, and it would not be a surprise to see it issue again in order to further improve its maturity profile.

CENTRAL CHINA REAL ESTATE

Central China Real Estate (CCRE) is a Hong Kong-listed Chinese property development group focused on Henan province, China’s most populous. Singapore’s CapitaLand, one of the biggest and most successful real estate companies in Asia, is a major strategic investor.

CCRE made its high yield debut in October 2010 with a US$300 million Regulation S/Rule 144a five-year non-call three senior notes offering. Lead managed by Deutsche Bank, ING and Nomura, the deal came during a period of considerable supply in Chinese real estate high yield, but its success demonstrated that appetite remained.

As a B1/B+ rated issuer, it had to pay a coupon of 12.25%, but this was well inside initial guidance of the high 12s and at the tight tend of revised price guidance of 12.25-12.5%. As momentum grew on a roadshow that began in Asia and then moved to London and New York, it became clear that the bond would be considerably oversubscribed and the roadshows was cut short after the New York leg; in the end total orders hit US$1.8 billion, from 147 accounts. This was the highest ever order book from a single B-rated transaction in Chinese real estate.

As is commonplace in China real estate deals, Asian investors formed the majority of the buyer base, taking up 58% of the issue. Less usually, Europe was a bigger presence than the US, with European investors taking 29% and American 13%. Also unlike many other PRC property issues, private banks represented a relatively small amount of the buyer base – thought to be around 5% – while funds took 77%. The bond rallied strongly in the secondary market.

China property companies are limited in the ways they can borrow money for property development, which is one reason they have been so active in high yield markets. In this case, $250 million of the proceeds were for use on new projects. With a successful bond established, it would not be a surprise to see CCRE back in the high yield debt markets in future.

CHINA ORIENTAL GROUP (see also issuer roundtable)

China Oriental is one of the largest private steel producers in China, focusing on H-section steel, strips and strip products, galvanized sheets and billets. It runs production sites in Hebei and Gangdong provinces and has a strategic alliance with Arcelor Mittal, the world’s largest steel producer, which holds a 29.6% stake in the company.

In August 2010, China Oriental launched a deal which would have major knock-on effects for the development of the Chinese high yield markets. It launched a US$550 million Regulation S/Rule 144a five year senior bond which, being from the steel sector, marked a divergence from the dominance of real estate issues from China.

The opportunity to diversify was avidly taken up by international investors and was considered a major success. Investors liked the story of Chinese steel production, and they particularly liked the backing of Arcelor Mittal; consequently, the transaction attracted some US$2.3 billion in orders.

This allowed the deal to achieve generous terms for the issuer, pricing at the tight end of 8-8.25% guidance despite a difficult global macroeconomic environment punctuated by European, UK and US worries.

A look at the order book – described as a “who’s who” of top global fund managers – illustrates some differences between China Oriental and Chinese real estate high yield deals. China Oriental was truly global, with a 42%/29%/29% split between Asia, Europe and the US, and with allocations to 150 accounts worldwide. Fund and asset managers took 68% of the deal. By contrast, KWG Property Holding launched at the same time, and was heavily dominated by Asian private banking accounts.

China Oriental would later be seen as a pivotal deal in terms of market development, because it demonstrated the appetite for non-real estate borrowers out of China. Other raw materials issues followed, notably Hidili and Winsway, both coal producers, on the back of this illustration of demand. In the 10 months since the China Oriental launch, a wide range of sectors have been represented in Chinese high yield, and more are expected to follow. China Oriental itself was swiftly back in the market, borrowing $300 million in seven-year non-call four bonds in November at a 7% coupon, and attracting US$1.1 billion of demand as it did so.

COUNTRY GARDEN (see also issuer roundtable)

Chinese property developer Country Garden is among the most experienced repeat issuers in Asian high yield. This was nowhere more obvious than in its US$900 million seven year non-call four global bond in February: the largest so far this year from China, and the largest in Asia if Pertamina (a quasi-sovereign) is excluded.

Country Garden had to pay up for its money – an 11.25% yield – but illustrated that despite concerns about oversupply in the sector, investors are still comfortable with experienced and sophisticated names. Country Garden did this at a time when policy restrictions on real estate in China are tight, and liquidity generally at home is weak, yet upsized its deal from a planned US$750 million and priced at the tight end of price guidance.

Country Garden has rather more of a global following than many other Chinese high yield issuers; on its most recent deal, CFO Estella Ng (interviewed in our issuer roundtable) included the US in a roadshow and as a frequent issuer it has built up strong relationships there (28% of the deal was eventually placed there).

Prior to that, Country Garden’s most recent deal was a US$400 million five-year Regulation S deal in August 2010, which was itself the fourth tap in 12 months yet still drew 129 orders worth US$1.25 billion. That deal followed a US$550 million deal, this time with a Rule 144a tranche, that April. The April deal came at an 11.375% coupon, suggesting pricing has not changed dramatically over the last year.

Outside of the straight high yield bond space, Country Garden has been active in other areas, notably a RMB4.3 billion (US$630 million) US dollar-settled convertible bond tender launched earlier in 2010 – although that tender, with a take-up of just 18.1%, was not so successful. The tender was to allow the company to make amendments to existing covenants and, through them, make investments in the Asian Games project in Guangzhou, among other things. A year earlier, Country Garden had weathered being put on review for possible downgrade by Moody’s, affecting US$600 million of debts. Strong issuers survive events like this, and Country Garden seems a more capable borrower than ever.

EACCESS (see also issuer roundtable)

The Japanese telecommunications company eAccess stuck out for two reasons when it raised its dual tranche high yield bonds in March. One was because the issuer was a rare Japanese credit in the global high yield markets; the other was because it did so in the immediate aftermath of the devastating earthquake and tsunami that hit the country.

eAccess needed funds to refinance a syndicated loan taken out by eMobile, which eAccess is in the process of taking over and turning into a subsidiary.

Japan has no high yield bond market, and eAccess had lined up another loan, but decided to see what it could get from the international debt markets. It set out with a dollar and euro tranche, with a commitment that the euro tranche would price 12.5 basis points above the dollar one.

eAccess hit the road to market the deal in March, and had not long arrived in the US when the earthquake and tsunami hit. It was a great achievement that the company, a debut issuer, was able to complete the deal, which it did by spelling out to investors exactly what the impact on its business would be.

In fact, remarkably, the deal was upsized. With bookrunners Credit Agricole, ING and UBS, it had originally set out to raise a total of US$500 million but instead ended up with the equivalent of about US$700 million: $420 million from a dollar bond, priced at 8.25%, and Eu200 million in the other tranche, priced at 8.375%. Both deals are seven years in tenor.

eAccess then had to swap both deals back into yen in order to repay the loan, causing them to bemoan the fact that no equivalent market exists in yen. High yield deals are very rare from Japan, and this is thought to be the first one at all in euros; finding comparables for pricing was therefore challenging. But eAccess is far from the only Japanese corporate with funding needs, so it is possible this will lead to the development of a new area of the market.

EVERGRANDE (see also issuer roundtable)

Evergrande Real Estate is interesting for its experience in two separate high yield markets: dollars, and synthetic RMB.

Its RMB9.25 billion synthetic RMB bond, equivalent to US$1.4 billion, was the biggest issue to date in that market, and also the biggest high-yield bond from a Chinese property company in any currency. The deal attracted an extraordinary RMB33.1 billion of demand across two tranches: 136 investors placed orders for the RMB5.55 billion three year tranche, and 108 for the RMB3.7 billion five-year.

The fact that Evergrande was able to raise these funds at 7.5% on the three year tranche and 9.25% on the five year – despite the fact that, as synthetics, they settle in US dollars and so involve no exposure to the swap markets – illustrates the funding potential offshore RMB represents for Chinese borrowers. Evergrande is only rated B1/BB – and its existing dollar bonds one notch lower – but investors like the credit and the yield, and also want the opportunity to gain exposure to the rising RMB.

Evergrande has also been something of a landmark borrower in dollars; in January 2010 it became the only high yield issuer in Asia to raise funds in the dollar bond markets in the whole of the first quarter. Its US$750 million five-year global bond was, at the time, the largest international bond from a Chinese real estate borrower, and it had to pay a 13% coupon to get it.

While it might get a lower coupon borrowing today in dollars, it certainly wouldn’t be as low as it achieved in RMB. Analysts at the time of the RMB deal suggested that the same deal, priced as a straight US dollar bond, would have had a yield of around 11.8%, and would of course not have delivered the RMB exposure.

Deals like these tend to sell locally. The RMB bond went 86% and 80% respectively to Asia in the three and five-year tranches.

HYNIX SEMICONDUCTOR

Hynix remains one of only two Korean issuers of dollar high yield debt, the other being Magnachip.

Back in June 2007, it priced a US$500 million 10-year non-call five global Regulation S/Rule 144a senior deal, which remains a Korean landmark in the capital markets four years on. The deal, before the global financial crisis really got into gear but at a time when Treasury volatility was beginning to gather pace, came with a 7.875% coupon, the tight end of a range that had gone as high as 8%. It had previously conducted a US$500 million downsized seven-year deal in 2005.

Hynix has one of the more troubled histories of Asian corporates, having come out of a long and acrimonious restructuring in 2005. So its 2007 deal, attracting a US$5.9 billion book from 310 orders around the world, was seen as a ringing endorsement of the credit’s rejuvenated health, particularly since at that stage Hynix was still very much in the hands of its creditors. It was striking that 40% of the deal went to US accounts, alongside 38% from Asia and 22% from Europe, with tech-savvy US investors a vital part of the deal. It went mainly, 56%, to funds and asset managers, and the proceeds took out the previous bond issue. Even in today’s buoyant high yield markets, it looks an achievement for the then Ba2/BB-/BB rated borrower to have gone below 8% pricing for a 10-year deal; since Hynix was downgraded the following year, it was clearly even more opportune from the borrower’s perspective.

Since then Hynix’s capital markets adventures have chiefly been in domestic bonds, such as a W300 billion three-year issue in September 2010. On that deal, for example, Hynix paid a quarterly coupon of 6.35%.

But in May, it decided to brave dollar markets once again, this time with a convertible. It was launched as a five-year $500 million bond with a conversion premium of 30% and an indicated coupon of 2.25% to 2.65%; however, it failed to clear the market, with the bookrunners (led by Credit Suisse and RBS) having to take much of the deal on their books.

INDIKA ENERGY

Indika Energy’s US$230 million issue of seven-year senior notes in October 2009 was one of a host of Indonesian natural resources bonds over the course of a one year period. It came weeks after issues from Adaro and BUMA (see separate write-ups) and was swiftly followed by Bumi, twice, and Berau Coal.

Indika itself is an integrated energy group whose main investment as a 46% stake in PT Kideco Jaya Agung, one of the country’s largest coal producers. Indika also has a presence in EPC (engineering, procurement and construction) and O&M (operations and management) businesses.

Indika was striking for the preparation that went into its covenants and share pledges. Among other things it agreed to a limit on debt at the parent and restricted subsidiary levels, a ratio test at the Kideco level, a pre-funded interest reserve account and an interest accumulation account. The proceeds from the bond were used to refinance existing debt and to investment in the power plant and a coal mine acquisition.

The deal, rated B2/B, was also interested in that it came in a Regulation S format but used Rule 144a disclosure, in order to boost investor confidence in due diligence and disclosure. Likely for this reason, almost half the deal went into Europe (33%) and the US (16%, all of them offshore since this was not a 144a deal). The deal was popular with hedge funds, who took 38% of the proceeds.

The disclosure rigour paid off: at an 8.5% coupon it was the lowest coupon and spread (391.4 basis points) ever achieved for a single-B rated Asian issuer. It attracted a US$3.84 billion order book, more than 15 times oversubscribed, with orders from 175 investors. About 130 received allocations.

Indika had visited the markets before, with a US$250 million five-year deal, paying 9%, launched in 2007 and due in June 2012. Earlier this year Citigroup was believed to be helping the company with a liability management exercise, offering more money in exchange for amended covenants on the outstanding bonds; this would likely allow Indika to launch another bond, rumoured to be US$300 million, to fund the acquisition of a stake in the shipping company Mitrabahtera Segara Sejati.

INDOSAT

When Indosat Palapa, a wholly-owned subsidiary of Indonesian telco Indosat, launched a US$650 million 10-year non-call five global bond in July 2010, it marked the conclusion of a long-delayed financing exercise.

Parent Indosat is a long-standing borrower in both the international and domestic debt markets, and had two bond issues coming up for maturity: 7.75% notes due 2010, and 7.125% notes due 2012. Indosat launched a tender offer for both bonds in 2010, seeking to amend a 2006 indenture on its bonds and for Indosat International to be released as guarantor under its 2010 indenture, but needed the Indosat Palapa bond to go through in order to fund it. The deadline on the tender offers was extended repeatedly while the bond’s bookrunners – Citi, DBS, Deutsche Bank, HSBC and Royal Bank of Scotland – waited for a suitable time to launch.

When it finally came, it was a success. The US$650 million bond drew a remarkable US$10.6 billion in demand from over 400 accounts worldwide, with 40% going to Asia, 33% the US and 27% Europe. Funds took 70% of the deal. The deal came at a 7.45% coupon and at 452 basis points over US treasuries.

In 2009, Indosat had borrowed locally, raising Rp1.5 trillion (US$159 million at the time) in a dual tranche five and seven year deal. Coupons for those deals were set at 11.25% and 11.75%, giving an indication of how international markets compared as borrowing options.

If Indosat was to go to local markets for its funding now, it would likely pay less; and less still in the bank lending market. One of the reasons Indonesian issuers have been notably quieter in international debt markets in 2011 is because of the abundant availability of domestic bank capital in Indonesia.

TRUE MOVE

True Move is a Thai telecommunications group, the mobile subsidiary of True Corp. In December 2006, it launched a US$465 million issue of 10.75% seven-year bonds.

The deal stands out as one of the most recent high yield issues out of Thailand. Lead managers Citigroup and Deutsche did well to complete the deal, and apparently did so on the basis of three major US orders, one of which was from a West Coast fund and potentially as large as $200 million on its own. Consequently the deal ended up with a most unfamiliar-looking geographical spread for an Asian high yield bond: 70% US, 11% Europe and 19% Asia.

Perhaps optimistically, the deal was structured with a make whole call at US Treasuries plus 75 basis points throughout its life, roughly equivalent to single A funding, with the idea being that the call should be exercised if the company’s ratios and profile improve dramatically.

That hasn’t yet happened, and instead in July 2007 the issuer was back with a US$225 million seven-year global bond through Deutsche Bank – just in time for True Move’s parent, True Corp, to avoid default on Bt25.8 billion of baht debt and US$170 million of dollar debt. The deal paid a 10.375% semi-annual coupon. This time the deal went a more typical 33% to the US.

Since then, True has focused instead on the baht bond market, completing a Bt6.18 billion 6.5% five-year deal in the local markets in April 2009.

YANLORD

Yanlord Land Group, the Chinese real estate developer, has been somewhat unlucky with timing in its recent efforts in the bond markets.

Its most recent deal, a $400 million seven year non-call four bond issue launched in March, was slightly delayed after its roadshow coincided with the terrible earthquake and tsunami in Japan. In the event, it only needed to postpone a few days for markets to settle, and the bond’s success – more than 175 investors put in $2 billion of orders – was a welcome sign of order at an uncertain time.

Yanlord’s bond was priced to yield 10.625%, at the tight end of price guidance that had initially talked about the 10.75-11% range, and was upsized from a planned US$300 million.

Its previous issue, in April 2010, faced different challenges: mountainous oversupply and cancelled deals. The week before Yanlord completed a US$300 million seven year non-call four issue, Agile (see profile) and Kaisa raised US$1 billion between them, and Glorious Property postponed a planned global of its own. This deal paid a 9.5% coupon and was also well covered despite the difficult environment.

Yanlord doesn’t have the geographical range or landbank of other Chinese property groups – most of its projects are in Shanghai – but it has a better balance sheet than many peers. Yanlord deals have also tended to offer good covenants to investors: the first bond, for example, stipulated that consolidated current net assets to consolidated net liabilities must not exceed 1.25 times, while Yanlord’s PRC borrowing is restricted to 15% of total assets.

Both bonds have been sold mainly to Asia (61% in the first, 53% in the second), and mainly to fund managers (70% on both). With two deals behind it, Yanlord has developed something of a following and should be expected to be a regular high yield issuer.