In a move that has caught most ex-Japan Asian bankers by surprise, Indonesia will shortly see its first securitization since the Asian financial crisis took hold in 1997. Merrill Lynch will arrange and underwrite a $600 million future-flow offering for energy concern PT Bumi Resources, backed by coal exports generated by two of its subsidiaries, PT Kaltim Prima Coal and PT Arutmin.
It is unusual for a deal of such significance to slip under the radar screen - especially since Merrill has secretly had the mandate for several months - many bankers were unaware of its existence until seeing a recent Fitch Ratings presale report. Speculation over arranging fees soon spread, with estimates that Merrill will earn anywhere from $10 million to $25 million for the deal.
The lead and issuer will begin a week of roadshows in Jakarta Friday before visiting investors in Singapore, Hong Kong, Germany, Holland, London, Los Angeles, Chicago, New York, Boston, Atlanta and Houston.
As a 144a offering with Regulation-S rights, Merrill bankers refused to confirm details. However, sources report the bank will not make any decisions about indicative price range until it has met with investors over this week. With no dollar-denominated Indonesia ABS to benchmark against, it seems likely the lead manager will look to other emerging market structured deals or Indonesian corporate unsecured bonds as a guide.
The single-tranche deal - to be issued from IndoCoal Exports Limited, a Cayman Islands-registered SPV - features a seven-year fixed rate structure rated BBB-' by Fitch. The structural enhancements allow it to pierce Indonesia's sovereign ceiling of BB-'. Enhancements include a reserve account and receivables being transferred directly to collection accounts in New York. This should mitigate to some extent the concern of getting access to the receivables through the Indonesian courts, which has not always been an easy process for foreign creditors. In addition, the sellers have agreed not to take on additional debt that may trigger early amortization for the term of the deal.
Fitch also took on board the contracts PT Kaltim Prima and Arutmin have with several major Asian utility companies. With demand for coal likely to remain high, due to the construction of coal-fired power plants across the region - which should also keep the price up - Fitch believes PT Kaltim Prima and Arutmin's coal exports and reserves of 959 million tons will be sufficient to meet obligations to investors.
The transaction uses a front-loaded amortization schedule to take advantage of high demand and prices for coal in the short-to-medium term, with 60% amortization likely in the first three years and the remaining 40% over the last four years.
Under the structure, PT Kaltim Prima (jointly owned by BP p.l.c and Rio Tinto until being sold to Bumi in 2003) and Arutmin will sell rights to the assets to two domestic SPVs. These will enter into a seven-year supply contract with a third entity, IndoCoal Resources, which will buy the coal and, in turn, supply obligors. IndoCoal Resources will then sell the receivables to the issuer SPV, funding the purchase by selling $600 million of notes to investors.
Aside from the shock of seeing an Indonesian ABS at all, eyebrows have also been raised at the size of the transaction. "The big question has to be whether it can sell," remarked one head of ex-Japan Asian ABS not on the transaction. "$600 million is pretty big, not just for an Indonesian ABS but also [for] a BBB-' credit."
Not everyone was skeptical about the deal selling, however. One banker who has looked at opportunities in Indonesia reported: "Based on my feedback, even at BBB-' this should be sellable, especially if it offers investors good yield opportunities."
It would be good news for Asian ABS franchises if Indonesia were to open up again. The country was shaping up to be a good source of business before the crisis took hold in 1997. PT Astra International completed a $200 million auto loan ABS via Barclays Capital in August 1996, and domestic auto-loan deals followed.
The last completed deal was an FSA-wrapped motorcycle ABS from finance company Putra Surya Multidana. The $144 million issue, arranged by Salomon Smith Barney, closed in October 1997, exactly one day after the region's stock markets crashed, effectively killing the securitization business in ex-Japan Asia for the next few years.
In 2003, bankers once again started looking at Indonesia, mostly exploring opportunities in the domestic market. Some foreign houses were even mandated to arrange local currency securitizations. Credit Suisse First Boston was due to arrange a credit card deal for Bank Internasional Indonesia, while ABN AMRO was picked for a similar issue from Bank Negara Indonesia. Other potential issuers such as Bank Danamon Indonesia, Astra and the oil and gas giant Pertamina also entertained the market.
At the time, many bankers remained highly skeptical about any of the deals getting done. It was felt, rightly as it turned out, that issuers would forgo the securitization route because they could get more attractive funding levels issuing straight debt. That situation remains the same; although optimistic bankers feel Indonesian banks will turn to securitization at some stage in the next two years to improve capital adequacy ratios ahead of Basel II.
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