Agung tests pricing after Indo ratings boost

Property developer PT Agung Podomoro made its international bond market debut on Thursday, becoming the first borrower to test unchartered waters since Indonesia attained its full investment grade rating.

The Jakarta-listed group itself has a Ba3/BB- non-investment grade rating and had been waiting for a market opening ever since Standard & Poor's upgraded Indonesia to investment grade status on May 19.

However, the ideal opening never really materialised. 

After initially tightening by 10bp to 15bp on the day of the upgrade, Indonesian spreads were on a softening trend all last week.

Investor sentiment has been hit by some particular steep ratings downgrades in the high yield space for Noble Group and Reliance Communications, not to mention Moody's decision to cut China and Hong Kong's sovereign rating, from Aa3 to A1 in the case of the former.

Agung Podomoro also had to contend with negative headlines in the local press concerning the country's landmark Jakarta Bay reclamation project. It is one of the developers on the 17-island project, which has been in the works for the past 20 years to help prevent flooding across the capital. 

Controversy surrounding the project helps explains why Agung's share price has underperformed its peers on the Jakarta Stock Exchange over the past year, falling from a peak of Rp322 last August to Rp193 on Friday. Year to date it is down 8.10% compared to a 7.93% rise in the Jakarta Composite Index.

During his recent election campaign, Jakarta's governor-elect, Anies Rasyid Baswedan, promised to shut down the reclamation without compensating developers on the basis they have been working on it without proper permits. However, maritime co-ordinating minister, Luhut Binsar Pandjaitan, has warned he will face a legal challenge from developers if he goes ahead as planned.

Agung is developing three islands covering 550 hectares but work has been stopped since last May.

When marketing the bond deal, the company also told investors they believe the project will go ahead since it is a flagship undertaking for President Joko Widodo.

But the twin domestic and international pressures meant that Agung needed to offer a fairly big premium over its nearest comparable, PT Pakuwon Jati, to clear the market.

The group also had a fundraising aim of $300 million, which is fairly large for an Indonesian property company and the largest ever for a first time borrower from the sector.

The order book closed at the $500 million level, which meant it was also taking quite a lot of paper off the table.

So after initially being marketed around the 6.25% area, the $300 million seven non-call four- year deal was priced at par on a coupon and yield of 5.95%. 

Pakuwon Jati has the same rating as Agung and raised $250 million from a similar seven non-call four deal in February. Its 5% deal was trading yielding around 5.2% when Agung priced on Thursday, which means the latter offered a 75bp new issue premium.

Distribution stats show that a total of 62 accounts participated, of which 77% came from Asia and 23% from Europe, Middle East and Africa. By investor type, 78% went to fund managers, 21% to banks and private banks, with the remaining 1% going to insurers and other investors.

Bankers also remarked that as well as achieving the lowest ever coupon for a debut Indonesian property borrower, Agung also achieved the longest ever tenor.

They calculated fair value in the 5.85% to 6% area. When it broke syndicate on Friday, the deal traded down half a point in line with other new issues launched from Asia on Thursday.

Bankers said the group should be happy with the result since it has been able to term out its debt profile. It also demonstrates how market access has come back for Indonesian high-yield borrowers.

Unlike many of its peers, it also has a fairly stable source of investment income to stabilize its cash flows. According to Moody’s this amount to 27% of total revenue as of December 2016.

The rating agency expects it account for 25% to 30% of revenue in 2017 and 35% to 40% of Ebitda. It said adjusted debt to Ebitda should come in around the 2.5 times level in 2017.

Joint global co-ordinators were BNP Paribas and Citi with co-managers BNI Sekuritas and Indo Premier Sekuritas.