Indonesia mandates three for sovereign bond

Indonesia picks Credit Suisse, Deutsche Bank and Lehman Brothers to manage its $1.5 billion bond transaction. Meanwhile, PT Truba and Korea Rail release guidance on their deals.
The Republic of Indonesia has mandated Credit Suisse, Deutsche Bank and Lehman Brothers for a bond transaction that is reported to be as large as $1.5 billion. The leads were selected from a shortlist of five banks that also included Barclays Capital and UBS.

The funds will be used to cover the sovereign's budget deficit.

In January, Indonesia priced a $2 billion deal via Barclays, HSBC and Lehman Brothers. While HSBC and Barclays were rotated out, market observers werenÆt surprised to see Lehman on this latest mandate. Mira Arifin, Lehman's head of debt capital markets for Indonesia, is reported to have extremely strong relationships in the country. Formerly employed by UBS, she is allegedly responsible for Lehman winning a number of Indonesian mandates.

Meanwhile, the presence of Credit Suisse and Deutsche Bank could have something to do with the Philippines' successful bond transaction in January, which was managed by these two banks. That deal was praised by the market for its solid execution.

Observers were surprised that Citi did not make the shortlist, given its strong record on sovereign deals and the fact that it introduced the borrower to a number of investors a fortnight ago. The bank is currently sixth in the Asia G3 league tables, according to Dealogic, behind HSBC, JPMorgan, Barclays Capital, Lehman Brothers and Deutsche Bank. The last time Citi ranked outside the top five was in 2003. But while traditionally a league table player, the bank may struggle to catch up this year.

On the high-yield side, PT Truba Alam Manunggal Engineering, the single-B rated credit that UBS (sole-lead) and BNP Paribas (co-manager) are ambitiously attempting to bring to market, has released guidance for an expected $100 million to $150 million bond deal at a whopping 17%-18% yield. The rumour is that initial yield talk was below 15%. ôThese kinds of levels arenÆt seen in the public markets, but I guess that they couldnÆt find enough investors in the private market to garner the demand,ö says a banker. By tapping the public markets, Truba is spreading the net wider and targeting investors who rarely see these levels of return.

ôOn the public side, this is the best-yielding paper investors have seen in a very long time but for investors in the private markets it isnÆt really compelling,ö says a syndicate banker not involved in the deal.

ôPrivate transactions are not liquid and investors canÆt easily trade out of the deal so buyers are holding the paper for the life of the bond," he continues. "As a result, investors are a lot more concerned about the nature of the credit, the reputation of the founders and so on.ö And some investors have serious issues with the company: Asia Pulp and PaperÆs former CFO, Hendrik Tee, has been president commissioner of Truba since May 21. Asia Pulp and Paper famously defaulted on $12 billion worth of debt in 2001, something bondholders haven't forgotten.

A number of bankers noted that issuers who have paid these levels of return in the past are no longer around to tell the tale, and Truba is potentially facing annual interest payments of between $18 million and $27 million, depending on issue size. An equity kicker, which would reduce coupon cash flows, doesnÆt seem to be on the cards. ôThese payments are very large for a small company, and people need to ask how it's going to cover those cash flows.ö UBS was not available for comment.

If Truba pulls off this deal, it will mark this year's first high-yield bond transaction and it's important for future issuance that the bonds perform well. But Nine Dragons Paper, rated BBB- and the closest the market has come to a high-yield transaction, has widened by 25bp since it priced two weeks ago.

Meanwhile, at the other end of the credit range, Korea Rail (A2/A) is looking to price a deal this week and has issued guidance of 160bp-170bp over Libor. This compares to Korea Southern Power's (A1/A-) 2013 bonds, which are trading at 168bp, and Korea Midland PowerÆs (A1/A-) 2013s, which are trading at 171bp.

Observers note that these are aggressive levels. Until now, issuers have priced deals at significant premiums to secondaries but the governmentÆs direct ownership of the company plays in its favour. Moreover, a change of control clause allows investors to redeem at par if the ownership of the government falls below 51%.

Both Truba and Korea Rail are expected to price this week.
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