IFR Asia – September 30, 2017

APP-China pays for comeback

„ Bonds Generous yield makes return less controversial than expected

BY INA ZHOU

APP-CHINA GROUP paid one of

Asia’s highest yields of the year

to win over investors on its

return to the US dollar bond

market.

The unrated 8.75% US$150m

two-year notes priced last

Tuesday at 99.552 to yield 9%,

the third-highest yield on an

Asian new issue in 2017.

It was APP-China’s first US

dollar bond since 2001, when it

was embroiled in Asia’s biggest

corporate default alongside

then-parent Asia Pulp & Paper.

The company split from

the Indonesian parent in the

aftermath of the crisis but still

counts APP’s Widjaja family as

its biggest shareholder.

Only Chinese financial-

leasing company Lionbridge

Capital and Chinese developer

Kaisa Group Holdings paid

higher yields than APP-China

this year.

Lionbridge Capital last

Thursday paid the highest yield

of 9.75% in Asia this year for

US$160m three-year non-call

two US dollar notes.

In June, Kaisa paid 9.375% for

seven-year non-call four bonds

issued in an exchange offer.

The bulk of APP-China’s

notes were allocated to Chinese

relationship banks, but some

global funds also looked past

its tainted history, drawn to the

high yield and APP’s growth

story in China, bankers said.

“The deal turned out to be

less tough than we had initially

thought. Surprisingly, some

global investors, who got

caught in APP’s debt default

in 2001, bought into the deal,”

said a Chinese banker familiar

with the transaction.

In March 2001, APP called a

standstill on US$12bn of debt

in the world’s biggest corporate

emerging-market default at the

time, after a currency rout and

plummeting pulp and paper

prices left it unable to finance

its aggressive expansion.

APP is part of the Indonesian

conglomerate Sinar Mas Group,

which, in turn, is part of the

Widjaja family business.

Statistics were not available

at the time of writing, but

orders had reached over

US$200m before the final

guidance was announced.

HIGH PRICE

“The issuer took very seriously

those investors who had

suffered losses in APP’s debt

default 16 years ago but now

viewed the company with new

lenses and were ready to re-

accept the credit,” said another

banker close to the deal.

The company made big

concessions on price to win

them back, even though

Ezion investor wants redemption

„ Restructuring Company disputes cessation of trading interpretation, sets up committees

BY KIT YIN BOEY

A dissident bondholder is

demanding redemption of

his investment in a bond of

EZION HOLDINGS , complicating

the Singapore oil services

company’s debt restructuring

and putting indirect pressure

on DBS Bank, which has backed

the notes via a committed loan.

The bondholder, who asked

not to be identified, argues

that the voluntary suspension

of trading in Ezion’s shares

since August 14 constitutes a

cessation of trading and entitles

him to seek redemption under

the terms of the S$120m

(US$89m) 3.65% notes due 2020.

The clause in the bond’s

pricing supplement states: “In

the event that the shares of

the issuer cease to be listed

or traded on the SGX-ST, the

issuer shall, at the option of

the holder of any note, redeem

such note at its principal

amount together with interest

accrued to (but excluding)

the date fixed for redemption

being the date falling 30 days

after the effective date. In this

condition 6(i), ‘effective date’

means the date of cessation of

trading.”

Law firm Dentons Rodyk

has advised that the share

suspension has led to a

cessation of trade under SGX

Rule 8.10.3, thereby triggering

the redemption option,

according to the bondholder.

Ezion rebutted the claim last

Tuesday, saying: “The company

wishes to clarify that the shares

have not ceased to be listed

or traded, and that the shares

have only been suspended from

trading.

“The company is therefore

of the view that condition

6(i) of the notes has not been

triggered and, accordingly, the

right to require the company

to redeem the notes...has not

arisen.”

MATTER FOR THE COURTS

However, at least one credit

analyst said the bondholder

could have a case.

“The bondholder’s argument

is a reasonable one, but,

if he pursues the case, it

would probably be the court

that would make the final

interpretation of what the bond

clause meant,” said a credit

analyst.

The bonds were issued in

2015, with DBS Bank providing

committed funding in favour

of the bond trustee. Moody’s

recognised the pledge, in the

form of an irrevocable and

unconditional committed loan

from DBS Bank, in February

this year when it assigned a

Aa1 rating to the notes. Ezion is

not rated.

While the Ezion bondholder

is not the first to ask for

redemption at the investor’s

option due to cessation of

trading in shares, he may be

the first to test the clause in

court if he chooses to do so,

although this would likely be a

very costly option.

News

“What we probably have here is a bondholder

trying to take advantage of a lifeline provided by

DBS, just in case Ezion ultimately is unable to

pay. It would be interesting to see if DBS would

honour its obligations if Ezion said it can’t pay

up.”

“APP-China has evolved significantly over the

years. Sixteen years ago, investors looked at the

Indonesian family when buying its bonds. Today,

the story is about its business development in

China.”