Indonesia’s Bakrie Group has unveiled a plan effectively to reverse a deal it struck with Bumi plc, a company that listed as asset-less investment vehicle Vallar, but which changed its name after buying stakes in Berau Coal Energy and Bumi Resources.
The plan has left Berau Coal’s investors having to scrutinise the original bond documentation.
Berau sold a $500m five year bond in March, when Bumi plc already held an 84.7% stake in the company. The bond came with a change of control put, assuring investors they would get $101 for every $100 of bonds they owned — take a deep breath now — if ever the majority of the company was not owned by Bumi plc, any of its affiliates, or any entity in which Bumi plc or one of its affiliates held more than 80% of both the capital and voting stock.
Change of control language is not always so fuzzy. Bharat Petroleum recently sold a $500m bond that will be in default if the Indian government no longer owns — “directly or indirectly” — at least half the company.
That language would only look vague to a pedant. The possibility of indirect ownership gives the government options, but it is still assures investors that they will have the government behind them come what may.
Balancing act
For most high yield issues, it is, understandably, a different story. They require a balancing act to write change of control language that will keep bond investors happy while also giving issuers options.
Yuzhou Properties, the most recent high yield issuer in Asia, used fairly standard change of control language for a recent $250m bond, at least when it came to permitted holders. The company told investors that permitted holders of the company were Lam Lung On and Kwok Ying Lan — chief executive and executive director, respectively — or their estates, their family members, their legal representatives, or any affiliate of all of these, or any entity in which they or their affiliates held more than 80% of the capital and voting stock.
It is obvious that Yuzhou has used practically the same language as Berau Coal did for its bond. Change of control is quite standard, and it is natural for investors to focus on two questions: how much are the permitted holders required to own? And how much will the company buy bonds back for if they do not own that amount?
These questions are the natural starting points, but they are not the only questions. Investors should not be willing to accept vague terms like "affiliate" without fighting back.
Bakrie Group is one of Indonesia’s most successful conglomerates. But it is hardly loved by bond investors and bank lenders, and investors in a Bakrie-related company will no doubt now be asking for more clarity over terms following the Bumi incident.
The questions are simple to ask, if not to answer. What counts as an affiliate? Is Bakrie & Brothers an affiliate? Is Long Haul? Is Bumi Resources, in which Bumi plc also owns a stake? How can a Bakrie Group company count as an affiliate even when the plan is to sever almost all ties with Bumi plc?
Bond investors and credit analysts do not know the answers to these questions. They will probably not find out until Bakrie Group’s attempt to buy back Berau Coal goes ahead. But there should be no doubt at this stage. The answers should be clear — and the questions should have come much earlier.
Note: Bakrie & Brothers did not respond to requests for comment to this article, and Berau Coal could not be reached.