Indonesia $1.5b sukuk receives huge order book

The sovereign was able to price its latest Islamic bond offering at competitive levels, riding on positive sentiment post-elections and lower risk-free rates.

The Republic of Indonesia launched an Islamic bond on Tuesday after ramping up interest for the dollar sukuk for more than a month, making it one of the first debt issuers since the summer.

Indonesia's $1.5 billion 10-year sukuk obtained a order book of more than $10 billion from nearly 400 accounts, according to a source close to the deal. The source added that this is one of the largest order books received for an international Islamic bond issuance.

As a result, ROI was able to tighten pricing by 27.5bp, resulting in a final outcome of 4.35%. On a curve adjusted basis, its existing Islamic bond expiring in 2022 was trading at a yield of 4.15% prior to announcement. Fair value for the new bond would be 4.35%, indicating that it priced flat to its existing sukuk curve.

Additionally, the sovereign’s new shariah-compliant bond priced inside its 10-year conventional bond, which launched at 5.95% early-January. “Risk-free rates have gone down over the course of the year, and Indonesia is facing more stable conditions post-elections, which caused the yield to drop more than 160bp,” the source told FinanceAsia.

The US 10-year yield was at 2.43% on Tuesday, according to Bloomberg data, much lower than the near 3% levels seen in January. 

Investors welcomed the election of Joko “Jokowi” Widodo as Indonesia's new president. Widodo has built a pro-business reputation and many expect him to implement previously delayed reforms that  could deliver more jobs, lower inflation and an economic revival.

The last time Indonesia tapped the sukuk market was in September 2013, when it issued a $1.5 billion 5.5-year bond, which obtained a total order book of $5.7 billion from 290 accounts.

Sukuk ambitions

Other sovereigns including the likes Hong Kong, the UK, South Africa and Luxembourg have expressed interest in tapping the market, following in Indonesia’s footsteps closely.

The Hong Kong government is in the process of issuing its highly anticipated maiden Islamic bond, establishing a benchmark for the instrument in the territory and setting the scene for more to come.

Hong Kong on August 28 announced that it has mandated HSBC and Standard Chartered as joint global coordinators, lead managers and bookrunners of the proposed dollar-denominated sukuk offering. Other joint bookrunners include CIMB and National Bank of Abu Dhabi.

Moody’s estimates that total sovereign sukuk outstanding account for more than 36% of the $296 billion of outstanding Islamic bonds as of July 2014. For sovereign sukuk, much of the growth occurred in the past three years, as annual issuance rose sharply from less than $15 billion in 2010 to $33 billion and $23 billion in 2012 and 2013, respectively.

Investor allocations

Fund managers purchased 57% of the notes; followed by financial institutions with 28%; central banks, sovereign wealth funds and supranationals with 13%; and others with 2%, sources said.

More than a third of which went to Middle East or Islamic investors, while 20% went to each of Asia and the US, Europe 15% and Indonesia 10%.

In secondary markets, ROI’s sukuk has traded slightly up to 100.375, which is equivalent to 5bp tightening to reoffer, according to Bloomberg.

CIMB, Emirates NDB, HSBC and Standard Chartered were the joint bookrunners of the sovereign’s Islamic bond.


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