Indika Energy returned to the US dollar bond market on Wednesday with the first new coal paper out of Asia since 2021 and the first high-yield issue out of Indonesia since October last year.
The Double B rated coal miner and energy infrastructure company raised US$350m from a five-year non-call two bond at 8.75%, inside the initial price guidance of 8.875% area.
Sources had suggested the lack of supply out of South-East Asia, and lack of high yield more broadly, could tempt investors, even if the deal was at odds with some of their ESG investment policies.
“In Asia, investors are starved of paper, because they are taken out by tenders and refinancings, so [that provides a] tailwind,” said a VP at a global asset manager when the deal was announced earlier this month.
“The market is so starved for supply from Indonesia,” said a banker away from the deal. However, he said his firm chose to stay out of the trade, citing ESG concerns.
In the end, Indika fell short of its US$530m target, as the choppy markets weighed in addition to ESG issues.
"The credit spreads widened by 10bp–20bp for Indonesian high-yield borrowers in the past week because of hawkish comments from the Federal Reserve, higher-than-expected consumer prices in the United States and geopolitical developments in the Middle East," the banker said.
Indika plans to use the proceeds to fund a tender offer for its outstanding US$534.1m 8.25% 2025 notes, with the offer capped at the size of the new note offering. It had said prior to the deal that any amount raised in excess would be used to expand its non-coal businesses, including electric vehicles and renewable energy.
With the bond falling short of its target, Indika could turn to the loan market or try to tap the bond later to refinance the 2025s, a banker on the deal said.
Greenwashing concerns
Indika aims to generate 50% of its revenues from non-coal activities by 2025 – though the new bonds are not linked to any transition targets – and in recent years has ventured into EV manufacturing, distribution and charging, as well as solar energy. It tried to pitch the deal as a transition story, but some observers expressed greenwashing concerns.
The banker away from the deal said the target was "punchy". “I am curious to know how they managed to convince the banks, but also investors, that they can get to this target by 2025,” he said.
An Indika presentation from April shows the company’s revenues from coal fell by just two percentage points, from 88.7% to 86.7%, between 2022 and 2023.
Eric Liu, a credit risk analyst at Nomura, noted that the decline was as much a function of weakening coal prices as it was of investments into non-coal areas such as gold mining, which has its own ESG challenges and is prone to project delays.
“It will be very challenging for them to transition,” he said.
A Fitch report on the new notes said the diversification strategy was "prudent and largely on track" but that the non-coal targets would likely only be reached by 2028.
Indika did not respond to requests for comment.
Order attrition
The book peaked at US$1.05bn, but final orders stood at US$740m from 103 accounts, including US$35m from the leads. Half of the deal was allocated to Asia, 39% to the US and 11% to EMEA. Fund and asset managers took 76%, banks and financial institutions 11%, private banks 11% and others 2%.
"It's normal to have attrition after the final price is announced and not a lot of accounts can touch coal companies due to ESG mandates," the banker on the deal said.
"European investors are the most sensitive on ESG, but that said, we had 11% go to EMEA, so those pockets continue to be very relevant," a second banker on the deal said.
She said there was a lot of demand from investors who held some of the US$700m in Indika bonds redeemed in recent years and wanted to reinvest in the name. The undersupply of Indika paper was "amplified" by the current tender offer, she said.
Earlier this month Indika announced it would exercise a May call option to redeem its 5.875% senior bond due in November 2024 using proceeds from a US$300m loan facility closed in December.
Analysts at Nomura estimated fair value for the bonds at a tighter 8.575%, which included a premium for the company's coal links. But they noted that the new issue concession it estimated was "merely fair" and pointed out that there is a "shrinking 'real' investor base for the coal sector".
CreditSights analysts saw fair value at 8.65%, using fellow Indonesian credits Bukit Makmur Mandiri Utama and Medco Energi as comparables. "While its ambitious green pivot is positive from an ESG and business diversification standpoint, we are wary of still-dominant coal mining operations, capex and associated project execution risks, especially during prolonged periods of low thermal coal prices," they wrote in a pre-pricing note.
“Definitely, there was a debate that the deal should tighten more,” the first banker on the deal said. “[But] the rates were moving higher in the US [and] the client wanted to reward the investors who are committed to the transition story,” he said.
The 144A/3(c)(7)/Reg S notes, which were sold at par, were trading at 99.5 on Thursday morning. The bonds will be rated Ba3/BB– (Moody's/Fitch), in line with the issuer.
Market reopening
Indika last issued in US dollars in October 2020, when it tapped the 8.25% 2025 bonds for US$225m. These were trading at 100.75 on Thursday.
The last new benchmark-sized coal paper out of Asia was Yanzhou Coal Mining's US$300m three-year bond issue priced in November 2021, while the last high-yield deal out of Indonesia was oil and gas company Medco Energi's US$500m 9.25% 5.5-year non-call two bond in October 2023.
These were trading at cash prices of 98 and 102.625, respectively, on Thursday.
Freddy Wong, fixed income head of APAC at Invesco, said current market conditions were “reasonable” for the high-yield commodity players in Indonesia to come to the offshore market, but that it was premature to say that the high-yield market for Indonesia is open.
“High-yield issuers from Indonesia may still want to wait for rates to settle so they can get cheaper funding at 6%–7%, rather than 8%, in the dollar bond market,” he said.
The bonds are guaranteed by subsidiaries Indika Inti Corpindo, Tripatra Multi Energi, Tripatra Engineering, Tripatra Engineers & Constructors and Tripatra (Singapore). They are also secured against pledged shares from the subsidiaries.
Standard Chartered, Deutsche Bank, Mandiri Bank and BNI were joint bookrunners.