Medco sells $100m seven-year bond

That's a lesson Indonesian oil and gas company PT Medco Energi International has learned, as it had to downsize its proposed five-year Eurobond offer in order to place it outside of Indonesia and without paying an exorbitant yield.

Medco priced US$100 million late Tuesday, instead of the planned US$150 million, at a re-offer yield of 10.5%, a price of 98.093, and a coupon of 10%.

It was a tradeoff: either Medco offered a higher yield to attract enough demand to sell US$150 million or it had to cut down the size of its offer.

Considering this is the first corporate fixed rate bond out of Indonesia since the 1997 financial crisis, the fact that Medco managed to place 60% of its bond outside of the country could be considered a success in itself.

But perhaps the biggest winner in the transaction is sole lead manager Credit Suisse First Boston, which raked fees worth 2.5% of the deal. CSFB Gets "Generous" Fee

True, CSFB had a challenging task with the bond sale, but its reward is significantly higher than the 1.25%-fee HSBC charged for its work on P.T. Bank Mandiri's bond.

Indonesian state-owned Bank Mandiri sold US$125 million of five-year floating rate notes, with three-year put and call options, last December.

What's more, amid the current competition among banks to win mandates in Asia, fees have been falling rather than increasing. The fees Medco paid "are very generous in the current environment," said one banker.

But another banker noted that CSFB's fees are justified, given how difficult it is to place single-B paper. The deal, which was issued by Medco's wholly owned subsidiary MEI Euro Finance Ltd. and guaranteed by Medco, is rated B+ by Standard & Poor's, above Indonesia's sovereign foreign-currency ceiling of CCC.

Perhaps that may explain why so many bankers have flown to Jakarta in recent months to pitch deals with potential issuers.

One banker who recently visited Indonesia suggested that there are several issuers eager to tap the international market. "But the question is, can you sell (those bonds)?" the banker asked.

CSFB proved you can sell, but not without the proper covenants. International investors are still very cautious of Indonesian assets, given the lack of creditor protection guaranteed by the country's laws and that many investors have lost a lot of money in Indonesia since the crisis.

As a result, the investors who decided to participate in the deal asked Medco to add three maintenance covenants to the bond: that debt-to-equity doesn't exceed a ratio of 1.75 times; that current liabilities are at least 1.5 times less than assets; and that EBITDA-to-debt service is at least one time greater.

After roadshows in Jakarta, Singapore, Hong Kong and London, Medco managed to attract 18 investors for the final book, half of which were funds and most of the other were banks. 60% Of Bond Sold Outside Indonesia Geographically, 40% of the deal was placed in Indonesia, 54% in Asia and 6% in Europe. In other words, there were seven Indonesian buyers, 10 Asian investors, and one European investor.

According to sources, there was enough demand in Indonesia to keep the size at US$150 million, but the company wanted to place the bond offshore to diversify its investor base.

Medco's deal will set a benchmark for its future issuance, but also "for other (issuers) with the right credits and the right covenants," noted one banker.

Observers have said that they reckon more deals will likely come out of Indonesia by the end of the year, on the heels of Mandiri's deal.

Now Medco seems to confirm that Indonesian companies are seriously looking at tapping the international market. But "there's only a handful of compelling Indonesian credits - (that is) five to 10 large (Indonesian) companies with strong cash flows or U.S. dollar revenues which could be interested in accessing the international market," the banker added.

"If you take the view that the rupiah will remain stable, then you should borrow in U.S. dollars," he suggested. Indeed, issuers can lock in yields significantly lower on the U.S. dollar market than they can on the domestic market.

With Indonesian short-term rates around 16.8%, Medco would have had to offer a yield in the high teens on the domestic market, rather than the 10.5% on its U.S. dollar bond.

No wonder then that PT Telekomunikasi Indonesia (TLK) is looking at the international market to raise part of the 1 to 2 trillion rupiah ($1=IDR9,942) it needs to help finance its capital expenditures this year. (*)