The mobile phone distributor said on October 26 that it would not be able to pay interest on its S$115m ($82m) 5.25% 2016s and S$100m 7.875% 2017s. The next coupon payments are due on November 10 and December 5, respectively.
“The company now finds itself unable to meet its debt obligations and the board of directors, in discharging its fiduciary duties, has performed a comprehensive review of the company’s debts for a potential restructuring with the aim of sustaining its business in the long term,” it said in a statement.
Trikomsel, which is unrated, said it has been facing financial difficulties since the start of the year due to the general slowdown in the Indonesian economy and a plunging rupiah. The currency has lost 9% against the dollar this year, the second worst performer in Asia after the Malaysian ringgit. Were it to get to the stage of a default, it would be the first default in the Lion City’s debt capital markets since the global financial crisis.
So far, Trikomsel appears to be an isolated case in Singapore, because strong credits such as the Housing and Development Board, Oxley and Keppel Real Estate Investment Trust successfully sold bonds earlier this week.
“It’s consistent with the trend in the Singapore dollar space prior to the Trikomsel announcement, which is that the market is very selective and remains open to high grade issuers only,” said Andrew Wong at OCBC fixed income research. “This selectivity is due to market volatility, a general risk-off sentiment due to the Fed’s rate hike uncertainty and concerns on the regional economic outlook, which in turn has led to poor conviction for investors and market illiquidity.”
With Trikomsel’s missed payment looming, market observers believe the risk averse sentiment is here to stay.
Xavier Jean, a Standard & Poor's credit analyst, said high quality, blue chip names would be buffered from the fallout of the missed payment, but others should be very careful about tapping Singapore’s debt market.
“Less recognised, debut issuers with no operational presence in Singapore may struggle to sell bonds, especially those from Indonesia,” he said. “They should think twice about offshore funding due to the increased selectivity among investors and potentially much higher yields.”
The news has brought uncertainty for issuers which have raised Singapore dollar debt in the past and have refinancing needs coming up. According to an S&P report published on October 16, a total of $2.5bn worth of corporate bonds are set to mature next year, and $3.5bn in 2017.
“Rising refinancing requirements are coinciding with a more cautious investor sentiment,” said S&P in the report. “At the same time, much eroded balance sheets at a time of slower growth could trigger additional defaults or proactive debt restructuring over the next 12-18 months.”
Subordination issues
To avoid default, Trikomsel plans to undertake a debt restructuring and has appointed FTI Consulting as a financial adviser and Ashurst as a legal adviser.
“What’s interesting to see with the potential restructuring is the structural subordination that offshore investors could face,” said S&P’s Jean.
Most of the company's assets sit in Indonesia, beyond the jurisdiction of offshore creditors, and the company has large onshore working capital loans from domestic banks. Jean said onshore lenders would have priority over bondholders — largely Singapore investors — in case of a default. This would add a layer of complexity to the debt restructuring exercise, he said.
That would be the key point during the restructuring talks, rather than just how to avoid default by extending the maturities, said a Hong Kong-based lawyer. “What’s going to have more lasting ramifications is the manner in which the restructuring is handled and the relative success or failure of ensuring fair treatment for offshore creditors,” he said. “As the first case in many years, Trikomsel must deal with issues of structural subordination and try to ensure fair treatment among onshore and offshore creditors as much as possible.”
Blessing in disguise
While an arduous task for the financially strapped company, market participants believe a restructuring would actually provide a good opportunity in the long term.
“It’s a blessing in disguise,” said a head of DCM in Singapore. “Yes, at first we will see volatility due to the default [on the payment] but the market has been too complacent given how long we haven’t seen a case of default.”
The last such event was in May 2009 when Celestial Nutrifoods defaulted on a S$235m convertible bond, and was followed two months later by Sino-Environment Technology Group, which missed an interest payment on a S$149m CB.
When it comes to a conventional bond, Lehman Brothers defaulted on S$791m of debt across in 2008 through 11 issues.
The DCM head said that Trikomsel’s lesson would help investors price up the risk a bit more, which in turn would help the Singapore bond market become more mature and developed.
“I think investors will at least perform more due diligence to understand structural and fundamental risks of issuers,” said OCBC’s Wong. “Whether this will be mandated by authorities remains to be seen but we do expect that issuers will need to satisfy a higher standard of disclosure for investors.”