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Asia-PacificJuly 31 2005

Cross-border deal is clinched

The upgrade of Indonesia’s sovereign rating gave momentum to a ground-breaking securitisation transaction that could be followed by others in Asia.
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The first cross-border securitisation out of Indonesia since the 1997 Asian financial crisis closed in late June, backed by future flow receivables from coal exports.

The IndoCoal Exports (Cayman) Limited transaction was structured by Merrill Lynch, which also acted as joint lead manager alongside Indonesian broker dealer PT Danatama Makmur. They successfully placed $600m worth of fixed rate bonds with a launch spread of 350 basis points (bp) over comparable US treasuries.

Given the ground-breaking nature of the deal, it was supported by an extensive marketing effort. The roadshow took in major cities including Jakarta, Singapore, Hong Kong, Frankfurt, London, Los Angeles, Chicago, New York, Boston, Atlanta and Houston.

The bonds were exempt from registration with the Securities and Exchange Commission, and were privately placed under Rule 144A/Regulation S, which targets highly sophisticated institutional investors that fall into the category of Qualified Institutional Buyers. About 48% of the bonds were sold to US investors, with another 35% in Asia, and the balance in Europe.

Investment grade rating

The bonds were sold in a single tranche with a final legal maturity of 2012, but an average life of 3.1 years. The bonds were only rated by one agency: Fitch Ratings assigned them a rating of triple B minus. The various structural enhancements allowed the deal to pierce Fitch’s sovereign ceiling of BB minus for Indonesia and achieve an investment grade rating, which is crucial to accessing the broadest possible investor base in the US.

The two streams of receivables for coal sales are being generated by the businesses of PT Kaltim Prima Coal (KPC) and PT Arutmin Indonesia, which are both subsidiaries of PT Bumi Resources. The two companies operate under a Coal Contracts of Work granted by the Indonesian government and together accounted for 29% of Indonesian coal produced in 2004.

Arutmin was originally set up in 1981 by Atlantic Richfield, which later sold the company to BHP Billiton. BHP in turn sold it to PT Bumi in 2001. KPC was originally set up in 1982 as a joint venture between BP and Rio Tinto. They sold the company to PT Bumi for $480m in 2003.

PT Bumi has a long track record of investing in hotels and tourism in Indonesia and around the world, but since the late 1990s it has disposed of hotel assets and evolved into a diversified natural resources company. It has been listed on the Jakarta Stock Exchange since 1990, and 57% of its shares are in public hands and the rest held by the Bakrie family.

Under the securitisation, the cash flows from KPC and Arutmin are wrapped in the transaction under a single structure, with payments made direct to the special purpose vehicle in the Cayman Islands.

Mitigated risk

The offtakers of the two companies are typically large utilities companies or industrial users of coal in Japan, Taiwan and elsewhere in Asia. Most of the coal produced is sold under contracts of one to three years, and counterparty risk is low because of the key offtakers’ strong credit profiles. The deal is exposed to some risk associated with the sale of coal on the spot market, though this is mitigated by the fact that demand for coal across Asia is strong and by PT Bumi’s well-established sales channels across the region.

“The transaction is not threatened by transfer and convertibility risk, as the structure captures the seller parties’ export receivables, which are denominated in US dollars and are collected offshore,” says Charles Chang, director of structured finance at Fitch Ratings in Hong Kong. “Moreover, export obligors will be given notice to pay their invoices directly into collection accounts in New York and held in the name of the trustee.”

New momentum

The deal had been discussed for several years but gained momentum last year when Fitch upgraded its sovereign rating for Indonesia. In January 2004, Fitch raised the sovereign rating to BB minus from B plus, while both Standard & Poor’s and Moody’s still have a sovereign rating in single B territory.

The Fitch sovereign upgrade made it a simpler task to achieve investment grade status for the bonds, with the help of the various structural enhancements. A high yield deal would be very expensive, and bank debt would probably be more competitive. With three-year US treasuries yielding 3.65% just prior to launch and a spread of 350bp, PT Bumi was raising fixed rate debt at just over the 7% level.

Structured finance investors around the world have a strong appetite for securitisation transactions. Such has been the level of demand from US and European investors during 2004 and 2005 that spreads on conventional asset classes, such as residential mortgage-backed securities (MBS), have steadily tightened in at the triple B level. Thus investors are looking around for some extra yield, plus the asset diversity provided by off-the-run transactions such as PT Bumi. And they are also becoming more comfortable with Asian risk as the Asian financial crisis of the late 1990s becomes more distant.

“Global investors, European in particular, have returned to the Asian asset-backed securities (ABS) market,” says Warren Lee, managing director and head, ABS-Asia, at Standard Chartered Bank in Hong Kong. “Besides the IndoCoal deal, other deals completed this year include two euro-denominated commercial MBS deals out of Singapore, and a euro-denominated Korean auto loan deal. The local currency ABS markets are also rapidly developing, especially in Taiwan and Thailand.”

Big deals only

On the question of cross-border deals, bankers point out that only the best companies or financial institutions in any given country need apply. And they note that there are heavy requirements in terms of management time needed to bring a deal to closure. High legal, structuring and rating agency costs mean that only sizeable transactions are worthwhile.

Bankers expect to see more deals coming soon from countries such as Korea and Singapore, while the first ever MBS transactions are near to closing in the domestic market in the People’s Republic of China.

“We prefer countries with the best legal systems and tend to avoid some jurisdictions,” says one banker in Hong Kong. “We expect to get involved in some more cross-border MBS deals out of Korea and there will be some more commercial MBS out of Singapore, although they don’t really have the population base to provide a lot of deal flow.”

Transactions in pipeline

Some upcoming transactions could involve the monoline insurers, which need to see transactions structured up to investment grade before adding their wrap to give bonds a triple A rating. The last cross-border securitisation out of Indonesia, just before the 1997 financial crisis, was wrapped by Financial Security Assurance (FSA).

“We have had a number of inquiries from bankers working with other Indonesian companies who wish to explore how they might use future flow transactions as a funding tool, as an alternative to bank borrowing,” says Hilary Tan, director of structured finance at Fitch Ratings in Hong Kong. “But future flow deals are highly complex from both a structural and legal point of view, and companies doing such deals must agree to be bound by various restrictions, such as those involving assignment of receivables and incurring additional indebtedness.”

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