Indonesia's Perusahaan Perseroan Persero (PLN) returned to the international bond markets for the first time in almost five years on Monday with a $2 billion dual tranche deal. The deal attracted an impressive $7 billion order book, but had a mixed performance in the secondary market.
The country's state-owned electricity producer, transmitter and distributor is only the second Indonesian issuer to raise more than $2 billion so far this year, following the sovereign's $3 billion sukuk in March. The new deal marks its largest ever.
But PLN appears to have picked a conducive market window for the country's credits, which have become noticeably more active during the second quarter.
There is widespread speculation that Standard & Poor's will finally upgrade Indonesia to investment grade status after its annual review within the next month or so. The rating agency currently has the sovereign's BB+ rating on a stable outlook, although wholly-owned PLN is rated one notch lower at BB.
HSBC analysts forecast that sovereign and quasi-sovereign spreads will tighten by between 10bp and 30bp if the agency moves in an upwards direction. Moody's and Fitch both rate the country investment grade already, giving it Baa3 and BBB- ratings with a positive outlook.
PLN's timing also appears to have benefited from moves in US Treasury rates, which are making long-dated bonds more attractive to investors.
Maturities beyond 10-years have always been a rarity in Asia. But they have been particularly thin on the ground in recent times, as investors became wary of adding duration given the sensitivity of long-dated bonds to rising US Treasury rates.
However, many market participants believe the likelihood of an interest rate hike by the Federal Reserve this June has already been priced into the market. Goldman Sachs, for example, has upped the chances of a rate hike from 70% to 90%.
As a result, fixed income analysts say, investors have become more comfortable at the long end of the curve where many believe there is still potential for outperformance on a total return basis.
This was reflected in the pricing, distribution and secondary trading of the 30-year tranche.
Pricing Details
The longer $500 million 30-year tranche was priced at 98.514% on a coupon of 5.125% to yield 5.35%. It had initially been offered around the 5.625% mark.
Syndicate bankers said they built a final order book of $2 billion with participation from 103 accounts.
By geography, Asia was allocated 38%, Europe 23% and the US 39%. In terms of investors, the book had a split of 60% funds, 22% insurers, 9% banks, 8% sovereign wealth funds and central banks, 1% private banks and others.
On the break, this tranche traded up nearly one-point to a price of 99.4% on Tuesday afternoon.
PLN also sold a $1.5 billion 10-year Reg S/144a bond. That tranche was priced at 98.99% on a coupon of 4.125% to yield 4.25%. The tranche had initially been marketed at 4.625%.
It attracted a final order book of $5 billion with participation from 235 accounts.
By geography, Asia took 54%, Europe 17% and the US 29%. By investor type, funds took 59%, banks 14%, insurers 13%, sovereign wealth funds and central banks 8% and private banks and others %.
In contrast to the longer-dated note, on the break the 10-year tranche traded down just below the re-offer on a bid price of 98.6%.
Comparables
PLN has a well-populated yield curve, but there is a noticeable gap at the 10-year point of the curve because it has been absent from the market for so long. This made fair value calculations slightly more complex — especially since the sovereign does not have a 2027 bond outstanding either.
PLN's nearest comparable bond is its 5.5% November 2021, which was trading at 3.7% on Monday according to syndicate bankers. It was on a marginally rising trend over the course of April.
The sovereign's comparable May 2021 bond was trading at 3.34% on Monday, some 36bp tighter than PLN's November 2021 issue.
The sovereign also has a January 2027 bond outstanding, which was trading around the 3.86% level.
This means there is roughly 52bp on the sovereign curve between 2021 and 2027, placing fair value for a new 2027 PLN bond at the 4.25% level, exactly where it priced.
Where the 30-year bond is concerned, PLN has an outstanding 5.25% October 2042 bond. This was trading around the 5.32% level on Monday, and had traded fairly flat over the course of April.
The sovereign has a much fuller curve at the long end, with bonds maturing in April 2042, 2043, 2044 and January 2046.
The curve between them is fairly flat with little more than 10bp between the 4.7% yield of the government's April 2042 bond and the 4.835% level of its January 2046 bonds. But this means there is much bigger 60bp pick up between the sovereign and quasi-sovereign at the longer end of the maturity curve. On this basis, fair value for a new 30-year PLN bond would fall around the 5.4% to 5.5% level.
That makes the final pricing look aggressive. But the bond traded up — in large part because of the much smaller tranche size relative to demand.
"This is what PLN wanted," said one banker. "Right from the outset, they made it clear they only ever wanted $500 million in 30-year money."
The issuer also met investors' expectations for longer dated paper. In a recent interview with sister publication AsianInvestor, Jim Veneau, AXA IM's head of Asian fixed income said the long end of the curve represented, "the last frontier for spread compression" following a bull run which has taken spreads to historically tight levels.
HSBC believes investors may also now be willing to take duration risk because of a recent flattening of the US Treasury curve. While 30-year Treasuries have risen from their mid-April lows to the 3.02% level on Monday, they are up only 18.65bp compared to a 22bp rise in 10-year Treasuries over the same period.
In its latest monthly bond market report, published on Monday, HSBC analysts said the US Treasury curve "bull flattening will be a key positive consideration from a total return perspective in the second quarter, especially if market participants have portfolios with durations above their benchmark guidelines."
PLN's declining credit metrics
PLN plans to use proceeds from the bond issue for its ambitious electricity transmission expansion plan.
Getting electricity to more Indonesians is a key part of the Joko Widodo government's policy. But it has put pressure on the PLN's stand-alone financial profile, which S&P downgraded from BB- to B+ last September.
The ratings agency said debt to Ebitda is likely to spike above five times. It projected PLN will report annual negative free cash flow around the Rp20 trillion mark, thanks to a doubling — or even tripling — of capital expenditure from between Rp25 billion and Rp40 trillion per annum to Rp80 trillion through to 2019.
Citi and HSBC were joint global co-ordinators of the bond, alongside co-managers Bahana, BNI, Danareksa and Mandiri Sekuritas.
