Indonesia concludes funding needs with $1.5 billion sukuk

The sovereign launches sukuk amid challenging conditions and pays the highest coupon since 2009.

The Republic of Indonesia closed a $1.5 billion sukuk on Wednesday morning, the largest single-tranche sukuk from an Asian sovereign borrower, and paid the highest coupon since 2009, according to Dealogic.

Indonesia, once a darling among investors, has seen foreign investors pull out of its bond markets. Like India, the country has been hard hit by the sell-off in emerging markets. The country is battling a current account deficit that widened to 4.4% of its GDP during the second quarter, while the rupiah has also depreciated sharply.

Against this challenging backdrop, the sovereign concluded its funding needs for the year, bringing its total funding size for the year to $5.5 billion.

The sovereign issued a five-and-a-half year bond, opting for a shorter tenor amid general aversion among investors to taking on longer duration risk.

The initial guidance was 6.375% and the bonds priced at a yield of 6.125%. The country's funding costs have risen sharply from April, when it issued 10-year bonds at a yield of 3.50% and 30-year bonds at a yield of 4.75% - a reflection of the vastly different market conditions.

According to a source familiar with the deal, the outstanding 2018s were the best comparable and those bonds were trading at 93 and yielding 5.45%. After adjusting for the curve difference, the fair value was about 5.7%, which meant that Indonesia paid a new issue premium of about 40bp.

The deal attracted an order book of $5.7 billion from 290 accounts. About 20% went to Islamic and Middle East investors, 15% to Indonesia, 25% to the rest of Asia and 16% to Europe. Notably, US investors took up a sizeable allocation, buying up 24%. 

According to the source, non-sukuk investors from the US were keen to buy the deal even though it is not included in some credit indices because it offered a premium over conventional bonds. In secondary, the bonds traded up a point and were quoted at 101 on Wednesday morning.

Funds were allocated 51%, banks 34%, 7% went to central banks and sovereign wealth funds, 4% to private banks and 4% to insurance companies.

Citi, Deutsche Bank and Standard Chartered were joint bookrunners.


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