Indonesia, Kexim bonds take Asia by storm

Both deals received whopping responses from investors pleased with Indonesia’s generous offering for its largest-ever bond and Kexim’s return to capital markets, riding on Korea’s safe haven status.

Two dual-tranche bond issues launched in the past few days have taken the markets by storm; a positive sign as the new year gets under way.

The Republic of Indonesia’s (ROI) $4 billion dual-tranche bond – split equally into 10- and 30-year buckets – was heavily oversubscribed, receiving a total order book of $18 billion from more than 700 accounts globally.

The same goes for The Export-Import Bank of Korea’s (Kexim) $1.5 billion dual-tranche paper – split equally between a three-year floating rate note (FRN) and 10-year SEC-registered fixed-rate bond – which received a total order book of $6.4 billion from 365 accounts globally.

Both deals have been riding the improvement in macroeconomic prospects, especially Indonesia of late, but Kexim’s deal has the additional advantage: the reputation of an astute borrower.

In the case of ROI – the second sovereign bond offering of 2014 after Sri Lanka – the generous initial price offering is what spurred investor interest from the start with bankers away from the transaction estimating a new offer premium of 40bp-70bp. This makes sense given the country’s credit concerns, they add.

The 10- and 30-year tranche started with an initial price guidance of 6.2% and 7.1% but ended up pricing tighter at 5.95% and 6.85% respectively, given the strong investor demand for Indonesia’s notes. As a result, the transaction size had to be increased from $3 billion originally to $4 billion, according to a source close to the deal.

“The Republic of Indonesia made a record-breaking return to the global US dollar market,” said the source. “At $4 billion, the transaction was the largest Asian sovereign transaction in the last 10 years, and the largest transaction ever by the Republic of Indonesia.”

“Investor demand was strong despite the ROI choosing not to conduct a physical road show as investors clamoured to be part of the Indonesia credit story [that has improved recently],” added the source.

In spite of the deterioration of Indonesia’s external payments position over the past year – a widening current account deficit and decreasing foreign exchange reserves – analysts note that these have stabilised recently.

Moody’s, which has assigned a provisional rating of Baa3 with a stable outlook to the Indonesian government’s bond offering, notes that the sovereign is supported by healthy economic prospects, structurally narrow fiscal deficits and low public indebtedness.

The rating agency also added that the country’s very large natural resources endowment also buttress the rating, although gross domestic product (GDP) per capita is still the lowest amongst the investment grade countries.

In secondaries, the 10- and 30-year tranches have both tightened by 14bp to trade at 100.50 at a yield of 5.81% and 6.71% respectively.

Bank of America Merrill Lynch, Citi and Deutsche Bank were the joint book runners of the Indonesia’s deal. Bahana Securities, Danareksa Sekuritas and Mandiri Sekuritas were co-managers of the transaction.

Safe haven Korea

Foreign investors are rewarding South Korea a “safe haven status” given that its current account surpluses and accumulated foreign reserves are serving as a defense against possible cross-border capital flight, according to the International Monetary Fund (IMF) in November.

The global body expects the economy’s growth to rise from 2.8% in 2013 to 3.7% this year but the figure was lower than 3.9% estimated by the Finance Ministry and 3.8% by the Bank of Korea (BoK).

All these factors serve as an ideal backdrop for bond issuance originating from South Korea, including the latest transaction from Kexim – one of the country’s most frequent and savvy borrowers – on Tuesday.

“Kexim is known for being not only the most prolific borrower in Asia but most certainly in Korea,” said the source. “They’re an SEC-registered borrower, which means that they have a full global distribution capability and is extremely rare in Asia. This makes it appealing to investors primarily those from the US.”

The $750 million three-year FRN tranche was announced along with the 10-year tranche with initial pricings of three-month Libor plus high-80bp and Treasuries plus high-120bp respectively, according to a term sheet. 

Both tranches were priced during New York hours at the tight end of the final guidance and also flat to its existing curve. The FRN was priced at three-month Libor plus 75bp, supported by continued bid in the short-end of the curve and appetite for rarely issued floating rate instruments, while the 10-year priced at Treasuries plus 112.5bp, says a source close to the deal.

The nearest comparables for the three-year FRN were Kexim’s existing 2015s, which were trading at Libor plus 75bp, while the 10-year were its existing 2022s that have a G-spread of 113bp at time of pricing.

The notes are currently trading at Libor plus 70bp and Treasuries plus 107bp for the three-year FRN and 10-year fixed-rate tranche respectively.

Bank of America Merrill Lynch, Barclays, Citi, Deutsche Bank, JPMorgan and Société Générale were the joint book runners of Kexim’s transaction.

¬ Haymarket Media Limited. All rights reserved.
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