Southeast Asia recycles its junk bonds

* Issuers call high-yield bonds issued in 2009 and 2010

* Record low rates for junk are the main attraction

* Refinancing can reduce funding costs by 300bp

By Christopher Langner

March 11 (IFR) - Indonesian power generator Star Energy Geothermal Wayang Windu (B2/B+) on Monday became the fourth Southeast Asian company this year to take advantage of low yields on junk-rated debt and upcoming calls for high-coupon bonds issued in 2009 and 2010 to lower its average yield. Many sub-investment grade dollar-denominated bonds that South-East Asian credits issued will become callable this year, meaning a flurry of debt exchanges and liability-management exercises is on the way.

Most of the junk-rated bonds issued in 2009 and 2010 had five year maturities and an option to be redeemed early, usually in the third year. This means most can be repaid this year, sometimes for a value smaller than the price at which these securities are trading.

Besides that possibility, bankers said the main reason for the expected pick-up in liability-management activities was the current yields on junk bonds. The average yield-to-worst on the Bank of America Merrill Lynch Single B and Double B corporate index is 4.9%, one of its lowest levels in history.

"Many companies, which issued in 2009 and 2010, can now get new money for 200bp, even 300bp, less," said a liability-management banker in Singapore. "You can now get wonderful coupons and lower a lot the average yield in the debt portfolio of these high-yield companies."

There are at least 20 high-yield companies from South-East Asia with bonds callable this year, according to data from Thomson Reuters. However, the potential universe of companies in the region willing to exchange their high-cost debt is much larger. The problem is getting investors to let go of paper that features a high carry to buy new, longer bonds that yield less. That is why bankers are focusing mostly on the issuers with callable bonds.

So far, most companies with options to replace outstanding high-coupon bonds with lower-yielding ones have given investors the option of an exchange.

In the first week of March, Ba1/BB rated Singapore chipmaker Stats ChipPAC, for instance, exchanged its 7.5% five-year bonds issued in August 2010, which were callable this year. The participants in the exchange received new five-year bonds with a 4.5% coupon, meaning the company managed to achieve a three-year extension to the maturity and a 300bp reduction in the cost of its debt.

Wayang Windu is looking at doing the same thing. The company issued dollar-denominated bonds with an 11.5% coupon in 2010. Those bonds now yield 7.6%, suggesting Wayang Windu may be able to cut its borrowing rates by as much as 400bp. Barclays and DBS are advising the company.

Investors have little option, but to participate. Those that opt out of the exchange have had to hand over their bonds when they are called and, if they want to regain exposure to the credit, buy the new, lower-coupon bonds in the secondary, sometimes at a yield even lower than what was offered during the exchange.

In the case of Stats ChipPAC, most investors participated, even though the carry on the new securities is much less attractive. "We actually gave investors a favourable route with the exchange," said a person close to the deal, led by Credit Suisse and Deutsche Bank.

Gajah Tunggal, more than any other issuer, perhaps, shows the advantage replacing high coupon bonds with lower-yielding ones. The company forcefully restructured its dollar bonds in 2009, issuing new 10% 2014 paper. In January, it called those bonds and issued US$500m of new five-year paper at a yield of 7.95% on a coupon of 7.75%. The deal was 7.5x oversubscribed, showing that investors were keen to buy bonds even at a lower coupon.

More importantly, the refinancing removed the restructured bonds from the market and, as a result, changed investor perception of the company. Moody's upgraded Gajah Tunggal right after the liability management exercise, while Standard & Poor's put it on positive outlook.

As a result, other issuers in South-East Asia are thinking of doing the same. Among those heard to be working on liability-management trades are ABM Investama, which mandated Goldman Sachs and Morgan Stanley last year for a new bond to replace a maturing one, and Medco Energi, which had mandated JP Morgan, DBS, UBS, Standard Chartered and Credit Suisse for the same reason.

"As these companies issued bonds three to four years ago in a much different environment, it makes sense for them to come" to the dollar market, said a syndicate banker.

Bankers said that some Indonesian and Filipino companies were looking to tap the bond market to refinance maturing loans, too. "Dollar bonds are still cheaper than loans for high-yield issuers", especially with the higher capital requirements for junk-rated loans under new Basel rules, said the liability-management banker.

In short, the message is clear for holders of high-coupon South-East Asian bonds: enjoy the carry while you can; soon enough, the bonds will be called and replaced for lower-yielding ones.