Fri 10/09/2020 02:00 AM
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Excel Download: Alam Sutera Exchange Model

In response to PT Alam Sutera Realty Tbk’s proposed exchange offer, at least four holders of the company’s $175 million 11.5% senior notes due April 2021 and $370 million 6.625% senior notes due April 2022 are wary of the company adopting an in-court financial restructuring route like Indonesian property developer peer PT Modernland Realty Tbk (MDLN). Consequently, the four holders think the exchange may be the best option due to the company’s relatively thin liquidity profile and potentially expensive alternative financial restructuring options. Continue reading for the Asia Core Credit by Reorg team's update on Alam Sutera, and request a trial to access our coverage of thousands of other financial restructuring situations.

One of the sources and a separate buyside source noted that the exchange offer was “as good as it gets,” especially compared to MDLN’s restructuring as an alternative outcome.

As reported and discussed during the roadshow calls last week, around 75% of the holders by value of the company’s notes due April 2021 and around 50% of the holders by value of its notes due April 2022 have indicated that they are “comfortable” with the terms of the exchange offer.

Negative Signalling from Due 2022s?

However, one of the above sources and another sell-side source flagged the disparity between the recent indicative pricings - the due 2021 notes are indicated at around 73/76 yesterday (Oct. 8) while the due 2022 notes were indicated at around 57/58.5, according to two of the sources. This raises the possible negative signalling by the due 2022 noteholders over their willingness to participate in the exchange offer.

Since early September, the notes due 2021 and due 2022 have corrected significantly, especially the latter as its bid price has decreased by more than 20%:

Source: Refinitiv | Oct. 8

The pricing correction since early September could suggest that the market is increasingly pricing in the risks of an exchange offer that will be significantly below the 85% acceptance threshold level - especially for the due 2022 notes considering its larger amount outstanding and likely broader investor base of whom a smaller proportion has expressed “comfort” with the terms.

Unilateral Waiver, Liquidity Concerns, In-court Restructuring?

This would mean that the exchange offer, to the extent any takes place, will be less successful in pushing out the company’s maturity profile and this increases the probability that liquidity concerns will persist beyond Q4’20. Alam Sutera is able to unilaterally waive the 85% acceptance threshold level, according to the exchange offer memorandum. However, as the company pointed out last week, there is not much “wriggle room” for this threshold to go down given the possible liquidity leakage from holdouts.

A lower acceptance level of the exchange offer increases the probability of a prospective in-court restructuring if holdouts remain significant relative to Alam Sutera’s liquidity position and cash flow generation. The company previously guided that 2020 cash inflows will roughly match cash outflows.

More immediately, a lower acceptance level could also result in an extension of the exchange offer’s timeline.

In the event the exchange offer is not completed, the covenant strip as previously discussed will not become effective, according to the exchange offer memorandum.

Exchange Offer Economics

According to Reorg’s analysis, Alam Sutera’s due 2021 notes is incorporating a discount rate of over 20% per annum at a price of around 75 cents to the dollar assuming the exchange offer goes through successfully for the new 3.5 year notes and the new notes will not be redeemed early:

See Excel Model for Details, Sensitivity Table

On the other hand, the due 2022 notes - given that 25% of it will be exchanged for the 3.5-year new notes while the remaining 75% will be exchanged for the 5-year new notes - is implying an overall discount rate of around 28% per annum. This is assuming a successful exchange offer and the new notes are not redeemed early when it is being priced by the market at around 58 cents to the dollar:

See Excel Model for Details, Sensitivity Tables

Note: The 5-year new notes will be incorporating a higher discount rate of 32% if the 3.5-year new notes component is assumed to adopt the same discount rate of 20% like the first table.

The implied overall discount rate of 28% appears high and could indicate that the market is increasingly pricing in a higher risk of an unsuccessful exchange offer for the due 2022 notes. Given the due 2022 notes have a significantly larger amount outstanding at $370 million and a potentially broader investor base, these may be other factors to consider that could negatively affect its participation rate in the exchange offer relative to the due 2021 notes.

Partial Exchange, Alternative Options

In the event that an exchange offer for the due 2022 notes is unsuccessful, the due 2021 notes could still successfully go through an exchange and if this takes place, it would provide Alam Sutera with some liquidity flexibility in the near-term to around H1’21 as it comes up with alternative financing or other restructuring solutions to meet its obligations for the due 2022 notes.

As previously reported, Alam Sutera does not have any other concrete alternative financing plans should the exchange offer fail. The company excluded the possibility of a potential equity injection from its majority shareholder, The Ning King due to his liquidity tightness.

While Alam Sutera could yet seek alternative or additional financing solutions from private credit funds if the exchange offer does not go through or is only partially successful, the cost of financing from such funds is likely to be expensive in the mid-to-high teens range, if not more, according to Reorg’s analysis. Such financing options could provide Alam Sutera with a stop-gap solution until the company’s operations improve substantially as the Indonesian real estate market improves or as a part of a longer-term restructuring solution that could involve an in-court process.

Alam Sutera’s capital structure is as follows:

Click HERE to Enlarge

-- Nidhi Pandurangi, Junguang Tan
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