You can’t offer risk without paying up
Indonesia’s Berau Coal Energy tried to tip the balance in its favour with its bond offering last week by asking investors to take on greater risk but not compensating them for it. Unsurprisingly, the deal did not see the finish line. BCE would do well to keep in mind the age old adage that you can’t have your cake and eat it too.
Berau Coal Energy (BCE), an Indonesian coal miner, did not have a happy time last week in the bond market. It opened books for a five year non call three issue with a target size of $450m on August 11. And on the face of it, the 10.5% initial pricing offered by the coal producer looked rather handsome compared to where some other single B rated deals had priced in recent weeks.
For examples, one need look no further than the 8% reoffer yield for Greenko’s $550m five non call threes and the 7% final pricing for Global Cloud Xchange’s $350m five non call twos. Both Indian bonds priced on July 24.
But the catch on BCE's deal was that the borrower was also seeking to loosen covenants restricting leverage and collateral. Among proposals raised in a concurrent consent solicitation were an increase in the amount of debt that BCE could incur for working capital and capex, from $50m to $200m, and a lowering of the shareholder approval threshold required for releasing certain collateral.
Faced with the likely prospect of having a considerably thinner layer of protection for a credit with a less than stellar corporate governance record, investors quite rightly viewed the 10.5% initial pricing as insufficient compensation for the heightened risk.
Talk from those away from the deal was that BCE would need to pay at least 11% in order to garner sufficient interest from investors. Some accounts indicated that if it had not been for the consent solicitation, the 10.5% initial pricing would have been adequate to get them across the line. But in light of the looser covenants, they said the company would have to pay up.
Borrowers don't always like to listen. Despite the feedback and the early warning signs of a cold shoulder from Asian accounts for the Reg S/144A deal, BCE refused to budge. One day later, with the bond still not priced, it pulled the deal.
This was a move that surprised the market, not only because of BCE’s intransigence in wanting to achieve seemingly incompatible objectives, but also because the issuer isn’t seen as a credit that can command enough interest to get its own way.
Not only does the company have a pressing need for funds to refinance its outstanding $450m July 2015s in the next few months to avoid a rating downgrade, but also it has been entangled in a spate of corporate governance problems, including shareholder battles. Although the separation between BCE’s parent Asia Resource Mining and the Bakrie Group in March was seen as promising, investors have still been treading carefully around the credit.
If BCE does return to the market at a later date, it should perhaps heed the experience of fellow coal industry credit Yanzhou Coal Mining, which successfully closed a $300m 7.2% perpetual non call two issue in May by paying a generous premium. The highly leveraged double B rated Yancoal returned to the market after a pulling a five non call three deal last year.
Likewise, single B rated Jingrui Property Holding also struck success the second time around by offering a five non call three deal on August 1 at initial pricing of 14%, 37.5bp wider than what the it had put on the table when it hit the market with the same trade in May.
Asking investors to take on higher risk is not a deal breaker in itself, but not offering sufficient yield in return certainly can be. Issuers could do well to remember the simple rule that there is almost always a trade-off between risk and return. Forget that and you’ll likely to come out of the market empty handed.