IFR/IFR Asia Year-End Review
It is a truism of the financial markets that investors have short memories, but they are never shorter than in a market rally. The peerless liquidity for emerging market equity over the last six months has brought no end of landmarks to the Asian capital markets – and allowed a few interesting names to raise funds alongside them.
At the time of writing, Sateri International was marketing an IPO expected to raise up to US$686 million, post-greenshoe, through Morgan Stanley, Credit Suisse and Bank of China International.
Sateri is being marketed as an emerging market growth story combining Chinese consumption with Brazilian resources. The pitch being delivered to investors runs like this: Sateri is one of the largest speciality cellulose producers in the world; it owns wood plantations in Brazil; it is the largest supplier of rayon grades of dissolving woodpulp to China, which is the largest market by demand in the world; and its products can be used for a range of consumer applications, chiefly textiles but also lip gloss, sunglasses, toothpaste, shampoo, cigarette filters and ice creams, among other things.
Emerging markets, consumption, commodities, pictures of children with lovely ice creams – what’s not to like? Well, some investors and bankers are rather surprised to see Sateri come to market, not because of the quality of the business itself, but because its owner: Sukanto Tanoto.
Lots of people know Sukanto well. One is Bank Mandiri, which published a list of its top bad debtors in 2006, with Sukanto’s Raja Garuda Mas pulp and paper company at the top by an absolute mile, owing Rp5.35 trillion in principal and interest at that time. (Mandiri did not respond to requests for an update on that debt position.)
Sukanto’s conglomerate of interests – which also includes the pulp, paper and fibre group April, the palm oil group Asian Agri and the resources group Pacific Oil and Gas – was badly hit in the Asian financial crisis, which came just as April was in the middle of a US$2 billion fundraising exercise for expansion. For years subsequently, Sukanto companies struggled to repay their debts, a position that observers have struggled to square with his great personal wealth. In particular, the member companies of the April Group – Riau Andalan Pulp & Paper (RAPP), Riau Prima Energy and Riau Andalan Kertas – wrestled with the almost US$1.5 billion they owed in 1999, with many creditors claiming attempts at commercially workable restructurings had been blocked or delayed. Foreign banks thought to have had to sell out of their claims at steep losses include Citi, ING and Standard Chartered.
Another group that knows Sukanto well is Deutsche Bank, which has been stuck in court with a Sukanto-backed company since 2006 in a dispute going all the way back to a $100 million bridging loan Deutsche bank extended to a company called Asminco in 1997. The company, owned by Beckkett, a vehicle whose owners include Sukanto, defaulted in May 1998, and three years of subsequent standstill agreements failed to yield a restructuring agreement. As collateral on the loan, Beckkett had pledged 40% of the shares in a coal company called Adaro, so by 2002, in order to recover its losses, Deutsche sold the pledged shares for $46 million to a group called PT Dianlia Setyamukti, run by Edwin Soeryadjaya of the Astra dynasty. The various parties have been locked in court for more than four years now on issues around the ownership of the shares, Deutsche’s efforts to find the best price for them and their right to sell them – and they’re still in court now. It has been an uncommonly acrimonious case, and it is understood at least one Deutsche banker has been unwilling to take the witness stand.
These days, Sukanto – regularly named Indonesia’s richest man by publications such as Forbes – has reinvented himself as a philanthropist and environmentalist, whose Tanoto foundation has “the aim of educating and empowering marginalized members of the community so they can improve their lives,” according to his own website. April, in particular, is painted as an environmental champion, a signatory to the UN Global Compact and a crusader against illegal logging; its branding is based on green leaves in nurturing hands. It’s a far cry from the institution whose Indorayon pulp and rayon fibre plant in north Sumatra had production halted by community protests in 1998.
Is Tanoto reformed, and his companies creditworthy? As marketing got underway, opinions were divided. “We will take a look, obviously, but instinctively we are likely to avoid it,” says one major global fund manager.
Others were more direct. “I cannot believe he is coming to the capital markets,” says one. “It really reflects to me how short people’s memories are.”
But a third camp suggests that Sateri may get its money after all, seeing the seniority of its bookrunners and the scale of its capital raising ambitions as an endorsement of the business’s propriety. “If he [Tanoto] was front and centre in the deal, I’d be amazed if Morgan Stanley and Credit Suisse could touch it,” says one manager. “We will look at the company on its merits.”
Certainly, the issuer and its bookrunners appear to be aware of how it looks: you only have to get a few pages into the summary section of the 446-page draft information material lodged with the Hong Kong Stock Exchange before the question of the controlling shareholders is raised. The prospectus confirms that Sukanto, his family, and the Gold Silk investment holding company he owns are the ultimate controlling shareholders, but is at pains to stress he “is not, and has never been, a director of our company or any of our subsidiaries and has not been involved in the day-to-day operational decisions of the group since January 1, 2007.” It adds that Sateri is not operationally dependent on Sukanto, stresses that all amounts due to and from him have been settled, that Sateri can still access third party financing without him, and that it has an internal control and financing system with its own accounting and finance department independent from him, including a separate treasury department. If there’s been a more strident attempt to distance a company from its owner in the eyes of the investing public, we are not aware of it.
Consequently, when one reaches the risk factors section, amid the usual disclaimers about resource price fluctuations and the global economy is a two-page section about “adverse claims and media speculation”. These include the Beckkett litigation, problems around Sukanto’s previous ownership of PT Unibank (which went under in 2001, although he was not a majority holder by then), allegations of tax evasion around the Asian Agri companies, illegal logging, and allegations of embezzlement dating back to the Asian financial crisis. All of these questions are raised by the issuer itself, presumably on advice from lawyers that it’s better to disclose them up front. “Whether or not justified,” the prospectus says, the claims “could adversely affect our reputation and our corporate image, or otherwise affect our ability to conduct our business.”
For their part, Sukanto’s representatives find criticism of their man misguided and out of date. IFR asked if investors should be worried about his history on debt repayment, and if he continued to hold bad debts to Indonesian or foreign lenders today. “No is the answer to both questions,” said a spokesman. “And additionally, the loan issues in no way relate to Sateri.” The spokesman says that although some loan obligations, such as the US$1.5 billion Mandiri syndicated loan connected to the RAPP plant in Riau, were restructured, “restructuring of loans was not at all unusual at that time in history, and RAPP has continued to pay back the loan. Many other troubled companies went bankrupt during the crisis, but RAPP continued to pay back the loan.” Sukanto’s team says that Mandiri publicly stated in 2006 that Riau Pulp Group had fulfilled its payment obligations under the syndicated loans.
“Although some of Mr Tanoto’s various companies went through difficulties during the Asian financial crisis, we believe these have been dealt with appropriately,” the spokesman says. “Across Mr Tanoto’s businesses there is now a large banking network from many different countries across several continents. The robust health of Mr Tanoto’s businesses today is further demonstrated by the strong positioning they have had coming out of the recent financial crisis.”
It’s not the first time Sateri has attempted to come to the capital markets since the Asian financial crisis. In 2005, it hired CSFB and Merrill Lynch to lead a US$300 million high yield bond. The bond was abandoned even after adding an additional security package, which investors had required before lending to a company owned largely by Sukanto. At that stage the company had Ebitda of US$43.5 million on turnover of US$228 million, plenty strong enough to get most bond deals away in that market, but the connection to Sukanto appeared to derail the deal even after the stock of two plantation companies were added as security. It did, however, subsequently raise the money it needed in a loan from WestLB.
However Sateri fares, it is already clear that buoyant markets have helped to rehabilitate troubled names in both the debt and equity side of the market. In September, Vista Land and Lifescapes completed a US$100 million five-year bond through Morgan Stanley, UBS and BDO. This was despite the fact that Vista Land is partly owned by Manuel Villar, also its chairman, who ran a company called Camella and Palmera Homes that defaulted on a US$150 million floating rate note in the wake of the Asian financial crisis. Several banks lost money as a consequence of the restructuring of the notes. Vista Land – which now has C&P Homes as a subsidiary – had to go offshore for its recent capital raising as memories are still somewhat sour within the Philippines.
Asia has also proven to be a forgiving place for issuers that, while they have no troubled financing background, have nevertheless been rejected elsewhere. Trony Solar, the Chinese renewable energy company, raised US$223 million in September in a deal covered on the first day of its roadshow – this after abandoning an IPO in New York late last year. Xinjiang Goldwind Science & Technology raised HK$7.1 billion in October, just four months after having abandoned a similar sized deal.
And it’s been a market that has allowed two major shareholder vehicles to sell US$156 million of stock in Chinese dairy group China Mengniu just two years after the company was involved in a scandal in which melanine was discovered in milk, killing four babies. Those shareholders got out at a price higher than before that scandal, such has been the force of the rally. Investors, it seems, have been willing to ignore a lot in order to participate in the world’s major growth story.