Medco Energi Internasional’s US$650m bond issue was the highlight in Indonesia’s corporate sector in 2019, showcasing the capital markets’ role in financing an overseas takeover.
The Indonesian oil and gas company had in March agreed to buy London-listed Ophir Energy to broaden its business to other parts of South-East Asia, Africa and Mexico, in a transaction that valued the target at £408m (US$528m).
Standard Chartered provided a US$550m one-year bridge loan, giving Medco the certainty it needed to complete the M&A, but a bond market take-out was always on the cards. The loan, syndicated to four other lenders, was conceived as a US-style bridge to bond and was refinanced before the acquisition closed – a rare feat in the Asian market.
The US$650m seven-year non-call four deal not only locked in a substantial long-term financing but also priced inside Medco’s curve, as investors factored in the transformational effects of the Ophir purchase.
Launched in early May, the bond issue seized on good market conditions and a rally in the oil price, pricing at 98.266 with a coupon of 7.375% to yield 7.7%. This was inside initial guidance of 8% area and around 5bp tighter than fair value estimates.
Final orders were over US$2bn from 154 accounts, even though Japan and China were on holiday. Asia took 50% of the 144A/Reg S deal, while investors in the US and EU booked 25% each.
Wholly owned subsidiary Medco Oak Tree issued the bonds, which are guaranteed by the parent company. The notes are rated B2/B/B+, on par with the guarantor.
Investors were given confidence by some structural features. The proceeds were initially held in an escrow account, and Medco agreed it would repay the notes plus an early redemption premium of 1% and accrued interest if the Ophir acquisition was not completed by July 4.
The issue also funded an interest reserve account covering six months of coupon payments.
Despite the substantial acquisition, Medco strengthened its financial position. Fitch upgraded it in April by one notch to B+, partly due to the proposed acquisition and partly reflecting the company’s efforts to sell non-core assets to trim debt. S&P also revised its outlook on Medco’s B issuer rating to positive from stable.
The surplus from the bond issue was
held in escrow and earmarked to refinance debt.
The bonds performed strongly in the aftermarket and had gained around four points in the six months after pricing.
Standard Chartered was sole global coordinator as well as joint bookrunner with ANZ, DBS, ING and Mandiri Securities.