Indonesia is undergoing a remarkable transformation from market pariah to market darling. The country’s capital markets are booming, it enjoys an investment-grade rating from two of the big three agencies and even the regulators are starting to make issuance easier.
Source: Reuters/Andry Prasetyo
Mount Merapi volcano erupts, as seen from Mungkid village in Magelang in Indonesia’s central Java province
Moody’s decision to follow Fitch in promoting Indonesia to an investment-grade rating paved the way for more issuers to come to the offshore market. The upgrade came just a few months after regulator Bapepam made it easier for companies to issue high-yield bonds. This set the scene for a flurry of deals across asset classes from Indonesian corporate issuers.
Under previous regulations, listed corporate issuers faced difficult disclosure requirements if they sold bonds in principal amounts of more than 50% of their equity book value. This meant that listed issuers needed shareholder approval to issue high-yield bonds and that entailed a 35-day process involving various shareholder meetings. This stunted issuers’ ability to tap the market quickly to get the best possible price.
The new rules, which came into effect on November 28, are more in line with the international bookbuilding process and now allow Indonesian high-yield issuers to tap the market quickly and opportunistically when a window opens.
The regulatory boost is already working wonders with issuers also drawing encouragement from the responses to two high-yield transactions from Indonesia this year.
In February, power utility Cikarang Listrindo re-opened the Asian high-yield market with a seven-year US$500m RegS/144a bond that was more than eight times oversubscribed. Then, in early March, Berau Coal came out with a five-year US$500m deal that was covered almost 20 times.
The success of the two transactions now has bankers and investors betting that several other issuers will come to market. “With the Cikarang Listrindo transaction effectively re-opening the Indonesia corporate high-yield market, we expect to see several previously delayed transactions in the next couple of months,” said May Chan, director, debt capital markets, Asia Pacific at Barclays Capital.
“There are a few that are looking for refinancing and there are others that are first-time issuers,” said Dicky Yordan, executive director and joint head of investment banking and financing, Indonesia, at Nomura.
Some blue chips may also be interested to test the new rise in investment interest towards Indonesian credits. State-owned oil company Pertamina has mandated a new transaction of up to US$2bn. The nation’s biggest cement maker, Semen Gresik, and the country’s fourth-biggest lender, Bank Negara Indonesia, have also announced plans to issue offshore bonds.
The confluence of scarcity of Indonesian bonds in offshore markets and a hungry investor base is expected to ensure strong interest for bonds out of Indonesia.
“Investors are sitting on a lot of cash right now,” Derek Armstrong, Credit Suisse’s head of DCM for Asia said of the strong responses. “Indonesia has been a darling for below investment-grade bonds for the past few years and most issued during 2009-10 are trading at all-time highs,” he added.
One of the reasons for the strong demand was scarcity value and upcoming redemptions. Thomson Reuters’ data shows that Indonesian corporate issuers face modest redemptions of just above US$2bn in foreign currencies over the next two years.
Open arms to Indonesians
The promotion to investment grade has also opened other funding options for Indonesia corporations. For example, the bank market is now more than willing to take exposure to Indonesian credits.
The rupiah loan market has always been the fallback funding option for Indonesian corporations, but, now, with the offshore markets opening up, these companies can demand better pricing levels onshore.
Indonesian issuers are also now able to borrow cheaply in their own currency as onshore liquidity conditions have improved.
Bank Indonesia lowered its deposit facility rate by 50bp in January to provide extra liquidity to the banking system and followed that with a 25bp cut in its benchmark policy rate to a record low 5.75% in early February. The central bank has indicated there is still room to cut rates further. Furthermore, international banks have realised they are underexposed to the country and have been ramping up loans there, even as they reduce their exposures to Asia more broadly due to problems in their home markets.
“Despite the general squeeze in the offshore loan markets, the top-notch names (from Indonesia) continue to have good access to reasonably priced loans,” said Barclays’ May Chan. Bumi Resources is the best example of that, as it has, within six months, signed as many bank deals.
So, in short, since the upgrade, the funding from the bank market is getting cheaper and longer tenors are available. Last July, for instance, Adaro secured the first 10-year corporate loan in Indonesia. The loan was one of several done in 2011 leading to record volume of US$12bn in 2011, 20% above the prior high of US$10bn.
Bilateral loans are already getting cheaper, while the syndicated loan market has yet to see clear signs of spread tightening. ANZ, BTMU, DBS, OCBC and UOB are close to launching a US$325m loan for Tower Bersama, only months after the borrower signed a US$200m six-year club loan with eight banks in September 2011. That loan paid an initial margin of 350bp over Libor.
Local beats global
The local bond market has also become very attractive for Indonesian companies. After the 1997/1998 crisis, Indonesia worked hard to develop its local currency bond market. That policy is now bearing fruit as local companies can raise significant amounts at competitive levels in their own currency.
A standard-bearer of the new reality was last month’s transaction from Astra Sedaya Finance, the financial service unit of Indonesia’s biggest listed firm, Astra International. The Rp2trn bond offering drew orders of Rp9trn (US$981.5m) to allow the company to more than double the issue size to Rp5trn and demonstrate the magnitude of local demand.
Demand does not look likely to wane any time soon. Some Rp26bn of corporate bonds are maturing this year, compared to Rp15bn last year, which means investors will have their pockets stuffed with money that they will seek to reinvest.
On top of that, local accounts have been more drawn to corporate transactions as foreign investors flood the treasury market, compressing returns on sovereign bonds. Investors have flocked to Jakarta’s local government bonds after its return to investment grade – foreign holdings of Indonesian Government bonds moved up to nearly 32% of total outstanding in February from 30.5% in December 2010.
Multifinance companies are at the forefront of this issuance flood, given the growing demand for vehicle financing – thanks to the country’s consumer boom. These companies, for instance, have strong business models and could be likely candidates to go offshore. Bankers say the scale of business for finance companies is very small and they could get pricing in the B rated area. However, with plenty of demand at home and revenue in local currency, they find little reason to do so.
Buyer beware
Granted, it is not all clear-skies. It takes little to jolt investors and see them pull out of the market, and they could exit Indonesia as fast as they have been entering it. An inflation scare in late February 2012 caused foreign investor holdings in the local Treasury market to drop two percentage points.
Also, the default of Berlian Laju Tanker is still fresh in investors’ minds after the country’s oil-and-gas shipping company said in late January it was freezing payments on its S$2bn debt, while it talked to creditors about restructuring its operations and finances.
That case followed Arpeni Pratama Ocean Line, which, in late January, completed a critical exchange of its outstanding debt, taking a major step towards the resolution of a restructuring process that has already been running for more than two years.
However, bankers dismiss these two cases as instances specific to the shipping industry, which has take a hit from the global economic slump that has had an adverse impact on demand for cargo, freight rates and ship values.
“Given the growing confidence in the institutional and political frameworks as backed up with Indonesia’s recent move to investment grade, I don’t believe investors will draw any broad conclusions on the country from an isolated case,” Barclays’ May Chan said.
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