Li Ka-shing exits Apexindo loan, sources say

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After months of dithering, holders of Mitra Rajasa’s (MIRA) USD 413m aggregate mezzanine notes are voting on whether to serve the company a notice of default, several sources familiar with the situation told Debtwire. The call to arms coincides with a decision by Chinese magnate Li Ka-shing to sell out of the USD 112m secured loan backing the company, they added.

Investors in MIRA’s USD 207m, 17% senior notes due April 2010 and the USD 206m, 17% junior PIKs due September 2010 have until today(20 August) to vote on a resolution directing trustee Citicorp to issue a notice of default. The senior mezz holder, composed solely of hedge funds and a US bank trading desk, are expected to meet the simple majority requirement to compel the trustee to act, said the sources familiar. O’Melveny & Myers, legal council to the mezz holders, is overseeing the vote.

Creditors kicked the default process into motion out of frustration that the company refused to start negotiating a restructuring following a covenant breach nearly two months ago. Mezz holders have a strong incentive to catalyze a workout, namely the risk of being crammed down under structurally senior and subordinated debt, the sources said.

Since the breach, MIRA met with mezz lenders only once, in early July, and the talks ended in mutual acrimony. Since then, controlling shareholders Tito Sulistio, Agung Salim and Beni Prananto have ignored noteholders’ calls for further dialogue. MIRA declined to comment. Despite the hefty political risk incurred by calling an Indonesian company into default, the mezz feel they have run out of alternatives, said the sources.

But part of the inertia blocking a deal arose within the mezz holder community itself, said some of the sources. One of the proposals considered in mid-June, two weeks before the breach was triggered, would have extended the notes by three years in part by reconstituting USD 107m of the senior mezz facility into three-year term notes issued via opco Apexindo Pratama Duta. That proposal was nixed in part because it raised the ire of junior mezz holders concerned about being left in the cold, said two of the sources.

MIRA’s USD 525m financing has been shaky since Goldman closed the deal last fall, one week before Lehman Brothers collapsed. Acquisition SPV Mira International Holdings (MIH) used proceeds from the mezz and the USD 112m senior loan to help fund its USD 671m purchase of the Indonesian oil rig operator, Apexindo. MIH breached covenants in June when Apexindo failed to upstream USD 219m to the SPV.

Cram down fear

Part of the game theory mezz investors must analyze is how the company will treat holders of the senior loan. Until last week, the secured debt had been held by Goldman Sachs as a proxy for Li Ka Shing, which rebuffed advances by the mezz to negotiate an inter-creditor accord on the restructuring.

There may be room for change now that Standard Bank has bought out Li Ka- shing, replacing Goldman as lender of record for the USD 112m facility, said three sources familiar with the matter. However, there are still questions about Standard Bank’s intentions toward the mezz and whether it also serves as a proxy for third party investors.

Cheung Kong, Li’s listed flagship, would not comment on the situation.

Another wildcard is that MIRA’s controlling shareholders might seek to repay USD 112.4m of vendor notes first although they are structurally subordinated to the mezz. The vendor facility is held by Encore International, a Panigoro family-controlled special purpose vehicle, and by the family’s listed flagship, Medco Energi International. They are the two parties that sold an 80% stake in Apexindo Pratama Duta to MIRA late last year.

Given the Panigoro’s political influence in Indonesia and that Apexindo is still dependant on Medco for a significant amount of its revenues, MIRA could decide to prejudice the mezz creditors’ interests by repaying the vendor facility first, said one mezz holder.

Uncertainty surrounding MIRA’s imminent restructuring has prompted some mezz investors to call it quits. A fund managed by Och-Ziff Capital, which bought both tranches of mezz debt at issue, has recently sold out to a US bank trading desk, according to market sources. The senior was sold at 55 cent on the dollar, they said. The team that initially bought the debt for Och-Ziff has since left the asset manager. Och-Ziff did not respond for comment.

Ticking time bomb

Should the senior mezz holders serve a default notice as expected, MIH will enter a 120-day standstill period. Following that, the creditors can begin seeking legal recourse, something they are so far reluctant to seek because of the inconsistencies in the Indonesian legal system, said some of the sources. “The point now is to get the clock ticking,” one of them said.

Covenant breach aside, MIH faces financial default if it cannot raise the cash to pay the USD 112m senior secured loan due 9 September. Apexindo must also pay off in September a USD 70m secured change-of-control loan owned by a US-backed hedge fund.

Apexindo has been trying to raise some of the funds needed to pay the change-of-control loan and for the upstream owed to MIH via a DBS Bank-arranged loan facility. That transaction has struggled under concerns about the mountain of pre-existing debt that would mature before the potential new facility comes due. The oil rigger in June did manage to raise some of the funds required by issuing a IDR 600bn (USD 60m) domestic bond that should at least make it possible for it to cover its own debt requirements.

In addition, MIRA’s controlling shareholders have been seeking to raise funds from Indonesian-based investors. But according to two sources with knowledge of these talks, the shareholders were unable to make a convincing case for the investment.

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