The Republic of Indonesia came back to the international bond markets late Wednesday (Oct 5) with a dual tranche $1.5 billion Reg-S 144A deal via joint leads Citigroup, Credit Suisse First Boston and Merrill Lynch. Despite being the subject of much debate thanks to its precarious timing so soon after the Bali bombings, the B2/B+/BB- rated deal came through unscathed and gathered a healthy final book totaling $4.25 billion.
The deal was upsized twice during the bookbuild, rising from $1 billion to $1.25 billion and then again to the final issue size of $1.5 billion.
A $900 million 10-year tranche was priced at 99.139% on a coupon of 7.50% to yield at 7.625%. This equated to a spread of 329bp over Treasuries or 283bp over Libor. This tranche has a long first coupon.
A $600 million 30-year tranche was priced at 98.666% on a coupon of 8.50% to yield at 8.625%, representing a launch spread of 406bp over Treasuries or 358bp over Libor.
Fees were 10bp for the 10-year and 20bp for the 30-year
The deal was marketed to investors with indicative yields of 7.625%-7.750% for the 10-year and 8.625%-8.750% for the 30-year. The 10-year was priced at the tight end of guidance, but nevertheless offered a stiff premium over the sovereign's outstanding April 2015 deal, which was yielding 7.40% at the time of pricing.
The order book was split $2.45 million on the 10-year and $1.8 billion on the 30-year, with 206 and 162 accounts taking part respectively. Geographically, the deal was split very evenly among Asian, US and European investors.
On the 10-year, 40% went to Asia, 31% to Europe and the remaining 29% to the US. On the 30-year 38% went to Asia, 33% to Europe and 29% to the US.
Leading up to the deal, many analysts commented that success would largely depend on how well the government approached fuel prices and fuel subsidies, which have been crippling the domestic economy in the wake of high global oil prices.
Last weekend the government raised domestic petroleum and kerosene prices by an average of 125% - significantly higher than the market had been anticipating. This move will drastically reduce spending on the fuel subsidy and help maintain the country's budget deficit target.
Giving investor confidence a further boost, the government has also announced a higher than expected interest rate hike of 100bp - consensus had expected a 50bp jump. The benchmark domestic interest rate now sits at 1.9%.
These moves have sent a clear signal that the government is willing to take necessary, and if need be, politically sensitive steps to maintain economic targets.
"The markets have given the Ministry of Finance and Bank Indonesia their vote of approval about recent policy decisions," says Sheldon Trainor, head of Asian investment banking at Merrill Lynch. "Investors have a lot of confidence in the country's long-term prospects of the country."
This may also explain why investors lined up for the deal.
Indonesia's sovereign bonds are usually compared to those from the Philippines, which has a one notch higher rating from the three agencies of B1/BB-/BB. Typically the Philippines trades much wider than Indonesia - largely because investors have less faith in the former government's ability to take unpopular steps to staunch its widening budget deficit.
Until Indonesia returned to the dollar bond market in April this year, the differential between the two countries' 2014 bonds had been averaging about 150bp to 170bp in Indonesia's favour. In the run up to Indonesia's badly received $1 billion 7.25% 10-year deal in April, the differential between the two narrowed to about 80bp.
By late August, when Indonesia's April 2015 bond had traded out to 7.8%, the differential between the two had narrowed further still to only 10bp. Since then, Indonesia's April 2015 bond has steadily recovered and the differential between this bond and the Philippines recent 8.875% September 2015 bond has widened back out to about 60bp to 65bp.
Investors with a positive view of Indonesia's credit story vis-a-vis the Philippines are, therefore, likely to believe that recent spread pressure will be short-lived and translate into significant upside for the new Indonesian bond relative to Philippines' spreads. However, this begs the question why the Indonesian government did not wait a few weeks longer to price off a tighter base.
The new deal's primary market success has also not yet translated into decent secondary market performance. The 10-year tranche pushed out 2bp on the break and was trading at a bid/offer of 7.75%-7.70% during Asian trading yesterday.
The 30-year tranche was holding up better, trading at a bid/offer of 8.68%-8.63% heading into the break.
But some bankers say this early performance reflected overall weakness in the emerging markets credits rather than an indication of the deal's strength or weakness.