The Republic of Indonesia entered the international bond markets for the second time this year on Tuesday, raising a record-breaking €3 billion ($3.4 billion) from a dual-tranche transaction.
The split seven- and 12-year deal was more than twice the size of the sovereign's last euro-denominated offering in July 2015 and achieved an impressive peak order book of €8 billion according to one syndicate banker.
However, its market entry follows the disappointing news last week that Standard & Poor's is not upgrading the country to investment grade status, although it did maintain its positive outlook.
The government's debt management team have long argued the country deserves the full suite of investment grade ratings because of its stable fiscal and monetary policy but S&P chose to focus on the cyclical and structural challenges Indonesia faces at a time of depressed commodity prices.
Nevertheless, the new Reg S/144a deal means the government has almost hit its full-year fundraising goal. In March, Robert Pakpahan, director general of budget financing, told FinanceAsia he hoped to raise 62% of his $9.71 billion foreign currency funding target by the end of the first half.
After adding in the Republic's $3.5 billion issue from December, which was a pre-funding exercise, and a $2.5 billion sukuk in March, it has now raised $9.4 billion.
This suggests the Republic has just $300 million left to raise and Pakpahan previously indicated this will be in yen. However, in the same interview he also said the government may increase the foreign currency component from 24% to 30% of the total if markets are conducive.
The new euro deal was initially marketed at 280bp and 340bp over mid-swaps before indicative pricing was tightened to a range of 5bp either side of 265bp and 330bp over.
Final pricing for a €1.5 billion June 2022 deal was fixed at 99.076% on a coupon of 2.625% to yield 260bp over mid-swaps.
A €1.5 billion June 2028 deal was fixed at 98.528% on a coupon of 3.75% to yield 325bp over mid-swaps.
One fund manager estimated both tranches offered an attractive 15bp new issue premium based on the sovereign's secondary market levels.
It has a 2.875% June 2021 deal, which was yielding 1.982% on Tuesday or spread of 197bp over mid-swaps.
It also has a 3.375% July 2025 issue, which was yielding 3.17% or a mid-swap spread of 274bp.
The shorter duration bond has either tightened or traded flat since it hit a low of 3.67% at the beginning of October, while the longer duration bond has been tightening since a low around the 4.31% level in late January.
Indonesia is often benchmarked against Turkey and Bulgaria, which share similar ratings.
The former has the same Baa3/BBB-/BB+ rating, although it is on negative outlook from Moody's and stable outlook from S&P. The latter has a one-notch higher rating of Baa2 from Moody's but the same ratings from Fitch and S&P and is also on stable outlook from both.
Indonesia averages an 80bp to 83bp premium over Bulgaria, which has a full complement of euro-denominated issues outstanding.
In its rating summary, S&P said Indonesia has improved its fiscal framework since its last assessment but it cited the country's low GDP per capita ($3,600) as a constraint and the shadow of contingent liabilities.
It flagged declining corporate credit metrics and increasing liquidity re-financing risks given corporates’ increased foreign borrowings between 2011 and 2014.
Joint global co-ordinators for the sovereign's new deal were: Barclays, Deutsche Bank, JP Morgan and Soc Gen. Co-managers were Bahana, Danareksa, Mandiri and Trimegah Securities.