Indonesia Coal Bond Buyback at 35 Cents Shows Depths of Distress

  • Berau planned buyback is cheapest since Arpeni's in 2011
  • Offer a `total disappointment' for bondholders, DBS says

Two Indonesian coal miners are discovering there’s some upside to watching their bonds sink into distressed territory. At least they can now afford to buy them.

PT Berau Coal Energy is offering to repurchase some of its U.S. currency notes for 35 cents on the dollar, the deepest discount seen for an Asian bond buyback in four years. At the same time, rival PT Indika Energy is asking investors to absorb up to 40 percent losses under a buyback plan.

The outlook for Indonesian corporate debt is clouded by a slump in commodity prices to the lowest since 1999, slower economic growth and the most credit rating cuts in three years. After a 55 percent slump in coal prices in almost five years, Berau reneged on $450 million of notes in August, taking the total of defaults by Indonesian borrowers to $7.5 billion of dollar bonds since the Asian financial crisis.

“These are opportunistic buybacks,” said Kim Jinha, head of global fixed income in Seoul at Mirae Asset Global Investments Co., which manages $73 billion globally. “I don’t think any meaningful industry recovery is possible. It could be a good chance for investors who want to exit without incurring much trading cost.”

Bondholder losses with coal buybacks in Asia
Bondholder losses with coal buybacks in Asia

Berau’s buyback isn’t the worst seen in the region. Now-defunct Asia Aluminum Holdings Ltd. repurchased notes at 22.5 cents on the dollar in May 2009, according to data compiled by Bloomberg, while Indonesian shipper PT Arpeni Pratama Ocean Line matched the miner’s offer with a maximum of 35 cents for its notes in December 2011.

The companies are among more than 100 throughout Asia, excluding Australia and Japan, that repurchased almost $50 billion of outstanding bonds since 2008, data compiled by Bloomberg show. The rest of the issuers offered between 42 and 126 cents on the dollar. For distressed deals, which are typically those below 70 cents, the average price paid was 48 cents.

“We haven’t seen such a distressed buyback since 2011,’’ said Raymond Chia, Singapore-based head of credit research for Asia ex-Japan at Schroder Investment Management Ltd. “Even some of the companies that were in deep trouble offered better prices.”

Indika Energy’s $300 million of 2018 bonds surged 5.8 cents on Nov. 23 after its 60-to-65 cents offer for some of its $300 million of 2018 notes topped the market price. They dropped 0.39 cents to 58.90 cents as of 11:05 a.m. in Hong Kong, according to Bloomberg-compiled prices. Berau’s $500 million of 7.25 percent 2017 notes swung between 33.5 and 40.3 cents on the dollar a day after the miner unveiled its partial buyback. They were little changed at 31.75 cents on Tuesday.

Indika didn’t reply to two e-mails and Jakarta-based president director Wishnu Wardhana didn’t return calls to discuss the buyback plan. Fuganto Widjaja, who oversees Sinar Mas Group’s coal businesses including Berau, declined to comment, according to his public relations consultant Citigate Dewe Rogerson.

Almost Worst

Indonesian junk bonds are the third worst performers in Asia this year after Mongolian and Indian debt, according to a Bank of America Merrill Lynch index. The spread over Treasuries investors demand to own Indonesian credit has widened to 845 basis points from 561 at the start of the year.

“Markets are tightening and the tides are going out,’’ said New York-based Hal Hirsch, a managing director at Alvarez & Marsal Inc., which specializes in debt recoveries. “Corporate and sovereign infirmities will no longer be overlooked or justified as an emerging-market development.”

The Berau buyback is a prelude to a new debt restructuring plan after a July proposal was scrapped last month. Sinar Mas, controlled by billionaire Eka Tjipta Widjaja, previously offered to repay $62.5 million of the 2015 bonds and convert the rest into securities due 2019. They also proposed repaying $56.3 million of the 2017 bonds and replacing the remainder with 2020 notes.

Deja Vu?

The Widjajas have had to negotiate a restructuring in difficult conditions before. Fourteen years ago, after the Asian financial crisis, their Asia Pulp & Paper business halted payments on $13.9 billion of bonds, loans and trade payables that included about $6.7 billion of dollar notes in the region’s worst ever default.

“This could be a tactic or strategy employed by the sponsors to wear out bondholders, by taking advantage of the weak thermal coal market conditions and leaving bondholders with limited room to maneuver,” Nancy Koh, credit analyst at DBS Group Holdings Ltd. in Singapore, wrote in a research note Monday. “This proposed tender offer, to say the least, is a total disappointment.”

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