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Private structured finance: In through the out door

In October 2006, Merrill Lynch raised $279 million to fund the leveraged buyout of Indonesian coal mining company PT Berau Coal by Indonesian businessman Rizal Risjad. The transaction was financed using two layers of secured structured debt with the subordinated issue, dubbed CELLS – collateralized equity leveraged loan securities – offering investors equity participation rights in the future sale or IPO of the company.

The structure provides investors with a highly attractive yield – 800 basis points over Libor – and significant upside from the equity participation. Meanwhile the deal secured control of 90% of Indonesia’s fourth-largest coal mine for Rizal – who held just 9.3% previously – without requiring him to invest any additional equity.

With the ink barely dry on the deal, Merrill began work on the exit for investors, another characteristic of structured deals that is highly attractive to investment banks.

“These deals are usually exclusive, intensively negotiated and lead to further transactions,” said Roger Suyama, managing director and head of Indonesian investment banking at Merrill Lynch, immediately after the deal. “We’re very comfortable this kind of funding can be refinanced by the public capital markets. The take-outs can either be through a high-yield bond or an IPO.”

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