Islamic Deal

IFR Asia Awards 2012
4 min read
Kit Yin Boey

A 10-year sovereign deal is a rarity in the Islamic finance market and, typically, reserved for countries rated far higher than newly investment-grade Indonesia. For pushing the envelope with a new point on its yield curve, the Republic of Indonesia’s US$1bn 10-year Global sukuk is IFR Asia’s Islamic Deal of the Year.

At a time when the government is stepping up its efforts to bring Islamic finance to the world’s most populous Islamic nation, the Republic of Indonesia’s third Global sukuk put out an important message.

Indonesia’s US$1bn sukuk came at a lower funding cost than any of the country’s previous dollar deals – in conventional or Islamic format. It also elevated the South-East Asian nation to an exclusive club of sovereigns that have sold 10-year Islamic bonds, despite its far lower credit rating.

There are only a handful of sovereign bonds with a 10-year maturity in the international sukuk market. Malaysia, home to the world’s biggest Islamic bond market, was the first to set a benchmark in June 2011, and the United Arab Emirates and Qatar have since followed suit.

All three are rated at least Single A and above, making Indonesia, at Baa3/BB+/BBB–, the first Triple B rated sovereign at that tenor.

Islamic investors are known for their strong preferences for shorter-dated paper and their demand for a premium over conventional paper.

That meant the sovereign had its work cut out for it. Not only was Indonesia testing appetite for a 10-year maturity, it was also looking to raise a sizable target at an aggressive price at a time when market conditions were weakening.

Indonesia is not a new name to Middle Eastern and Islamic investors, having previously launched two sukuk at maturities of five and seven years.

This time, though, Indonesia had something new to offer – its first investment-grade US-dollar sukuk after Moody’s and Fitch upgraded the sovereign to Baa3/ BBB–.

The better credit score was always going to be a strong draw, but joint leads Deutsche Bank, HSBC and Standard Chartered also pointed to the convincing pitch that the sovereign had delivered during investor meetings. A roadshow to meet new investors in the days preceding the deal had deliberately targeted Middle Eastern buyers.

The deal was launched and priced on November 14, drawing an order book of US$5.3bn from 250 accounts. The Reg S/144a bond was priced on November 14 at 3.30%, 20bp tighter than initial guidance. That revision was a far bigger tightening from early price talk than US-dollar issuers had managed on the same day, with risk aversion starting to creep up after a sustained rally in global credit.

Despite the cooler conditions, the 3.3% coupon was Indonesia’s lowest on any US-dollar bond. Indeed, it also represented the lowest coupon and yield ever achieved for a 10-year US-dollar bond for an Asian sovereign.

The new notes also came inside Indonesia’s implied curve, based on a quote of 2.95% for its outstanding 4% US-dollar sukuk due 2018, which translated to 3.60% on an implied 10-year curve. That meant the new sukuk came 30bp inside the 2018s.

At 3.30%, it was an attractive level for Indonesia, since that implied a higher-rated sovereign. The coupon came just 16bp above the 3.241% that the state of Qatar paid for its US$2bn 10.5-year sukuk, an impressive feat given that Qatar, rated Aa2/AA, is seven to eight notches above Indonesia.

The bonds fared better than the broader credit markets the day after pricing. The Asia investment-grade index widened 5bp on the morning of November 15, but the new sukuk was down only marginally to 99.75/100.00, reflecting the tight distribution and spot-on pricing.

Indonesia’s latest sovereign sukuk achieved all its objectives. It targeted the sukuk at the Middle Eastern and Islamic investors, and met the goal with some 30% of this deal allocated to that base. In the process, Indonesia had not only roped in a number of new investors, it also established a new liquid benchmark on its sukuk curve.

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