Singapore court to begin Adaro ownership dispute case today
Monday, February 20 2006 - 02:22 AM WIB
Anna Ho, a Moody's Investors Service credit analyst who covers Adaro, said that the court case isn't an issue for the miner's Ba3 rating or its stable outlook for now, but warned that if ownership of the shares does change "it may impact the rating."
Some analysts said that a change in ownership could alter the current business model under which Adaro plans to expand output and pay down its debt.
Officials at Adaro weren't available to comment.
So far, investors don't seem to feel the hearings will impact Adaro's US$400 million in 2010 bonds. They are focusing instead on the outlook for coal prices and the performance of the junk-grade sector more broadly.
"The fact that I haven't seen anyone selling in the last few days suggests the outcome will be quite benign for the bonds," said a high-yield bond investor, adding that subinvestment-grade bonds are susceptible to any hint of bad news.
Indeed, Adaro's bonds - sold in December at a yield of 8.75% after attracting orders of more than $1.7 billion - are trading at around 7.67%, or a spread of 3.1 percentage points over U.S. Treasurys, with investors gasping for the juicy spreads offered by all junk bonds.
At the center of the case is a 40% Adaro stake that Beckkett owned indirectly through holding companies.
The stake was pledged -- along with other shares, including sister company PT Indonesia Bulk Terminal -- as collateral in a $100 million loan that Deutsche Bank advanced in October 1997 to PT Asminco Bara Utama. Asminco was an investment company part owned indirectly by Beckkett.
When Asminco defaulted on the debt, Deutsche Bank in November 2001 sold the pledged shares to Dianlia Setyamukti. The sale of the pledged assets brought in $46 million, with the largest portion raised from the sale of Adaro stock. Dianlia is controlled by Indonesian businessman Edwin Soeryadjaya.
Since then, Adaro has undergone an ownership restructuring. Currently, business groups led by Mr. Soeryadjaya and by businessman T.P. Rachmat each own about one-third. The remainder belongs to a consortium of international investors, including Farallon Capital Management, the Government of Singapore Investment Corp., Kerry Group and the private-equity arms of Goldman Sachs Group Inc. and Citigroup Inc.
Beckkett - whose shareholders include Indonesian businessmen Sukanto Tanoto and Hashim Djojohadikusumo -claims that Deutsche Bank sold the shares to Dianlia at a below fair-value price in a transaction that wasn't at arms length.
"The sale by Deutsche Bank to Dianlia of shares in Adaro and Indonesia Bulk Terminals was wrong. Beckkett is pursuing this case because we want the truth to come out in court and the shares to be returned to us as the rightful owner," said a spokesman for Beckkett.
Deutsche Bank denies any wrongdoing. "Deutsche Bank will strongly contest the case and is vigorously pursuing its counterclaim against Beckkett for over $110 million in outstanding loan and interest payments they guaranteed in 1997," a Deutsche Bank spokesman said.
The rising interest in assets like Adaro comes as global demand for coal - particularly the cleaner sub-bituminous variety - is soaring and with prices going up likewise.
Indonesia is the predominant global supplier of sub-bituminous coal, and Adaro - with a single site in South Kalimantan - possesses exclusive mining rights to the 1.33-billion-metric-ton reserve of the ultralow-level sub-bituminous coal it sells under the trademark Envirocoal.
Adaro, which has 20% of the Indonesian coal market, is expected to boost production from 27 million metric tons in 2005 to 35 million by the end of 2007.
Standard & Poor's Ratings Services, which ranks Adaro at B-plus with a stable outlook, said Adaro's leading position and the low production costs support its credit standing.
Ratings would change only if the company's operational or financial status were hurt by the court case or something else, said Yasmin Wirjawan, who covers Adaro for S&P.
J.P. Morgan Chase & Co. - which earlier this month initiated coverage of Adaro's bonds with a "buy" rating - believes the company should be able to reduce its debt stock by as much as 27%, or $240 million, by the end of 2007.
Alongside the $400 million bond, Adaro also has about $200 million in amortizing senior bank loans and $354 million in mezzanine debt as of the end of 2005. J.P. Morgan and Goldman Sachs were lead managers for Adaro's 2010-bond sale last year.
Few other banks have official coverage of Adaro since they don't view it as a large enough credit, but at least one other bank not involved in the bond sale also has an "overweight" position based on its low-cost upstream business.
"Factored into the price is that the litigation will not succeed," said one market participant, adding that any change in ownership would cause him to take a second look at the bonds. The court hearings are expected to last about three weeks. (*)