Indonesia interests investors

Sovereign graduates from the IMF with first class honours in the international bond market.

The Republic of Indonesia returned to the international debt markets for the first time in eight years yesterday (Wednesday) with arguably the most smoothly executed Asian sovereign transaction of quite some time. The deal sailed through the market from start to finish and while pricing was tight, it was not as ludicrously aggressive as the China and Korean sovereign bonds of 2003. Many now expect the whole Indonesian curve to be pulled in as a result of its success.

Under the lead of Deutsche Bank and JPMorgan an upsized $1 billion 10-year transaction was priced at 99.285% on a coupon of 6.75% to yield 6.85%. This equates to 277bp over Treasuries or 237bp over Libor.

The deal was initially marketed as a $500 million issue, but officials had always said it was likely to be increased to $1 billion. A large order book just topping $4 billion also enabled indicative pricing to be driven in from a yield around the 7% mark to a final indicative range of 6.85% to 6.90%.

On a like-for-like basis the new bond came about 5bp to 10bp through the sovereign's existing August 2006 bond. This was bid around the 4.10% area to yield 238bp over Treasuries or 189bp over Libor. It has traded in about 10bp over the past week.

Indonesian government officials eagerly await pricing details in New York.

Given that the 2006 bond always trades very technically and has been heavily asset swapped, the sovereign did a good job holding in such a tight theoretical spread. Doing so meant the B2/B rated credit came well inside its nearest Asian comparable, the Ba2/BB rated Republic of the Philippines.

The latter has a January 2014 bond bid yesterday at 8.81% to yield about 476bp over Treasuries or 417bp over Libor. This equates to a 196bp differential between the two.

Indonesia's pricing level relative to the Philippines can partly be attributed to rarity value and partly to upwards rating momentum. This in turn appears to already be having a beneficial effect on the rest of the Indonesian credit universe.

Corporate credits traded in 5bp to 10bp yesterday and the three cellular operators - Telkomsel, Indosat and Excelcomindo - have also all tightened in between 25bp and 40bp over the past month.

Observers report participation by 272 investors in the new deal. By geography, the book split 36% Asia, 35% US and 29% Europe. By investor type, asset managers took 55%, banks 24%, private banks 13% and insurance companies 8%.

Indonesian based investors only accounted for about 7% of the total. From the outset the country aimed for balanced distribution across all three continents.

Had it focused more of its attention on domestic investors, it may have been able to marginally tighten pricing further down. However, this pent-up onshore demand may now feed through to the secondary market and support primary market pricing levels.

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