Rival bankers were quick to attack lead managers Barclays Capital and UBS over Indonesia's utilisation of its $4 billion global medium-term note (GMTN) facility to raise $3 billion late last week. The 144a, Singapore-listed, dual-tranche deal priced in the early hours of Friday morning Hong Kong time.
"The Indonesian taxpayer is paying over $200 million more in interest charges than he should be on this deal, because the deal is too cheap," says one rival banker.
The new Republic of Indonesia (ROI) issue consists of $1 billion worth of five-year bonds, rated Ba3/BB-/BB, and $2 billion worth of 10-year bonds, rated the same. The five-year tranche carries a semi-annual coupon of 10.375% and was priced at 99.455 to yield 10.5%, or 850bp over Treasuries; while the 10-year tranche has an 11.625% coupon and was priced at 99.276 to yield 11.75%, or 881bp over Treasuries. Both tranches were priced at the tight end of their respective guidance. Demand came in at a solid $7.25 billion in total, with the two maturities attracting more than 200 orders each.
The new bonds rose two points after trading started on Friday, and prices on existing ROI paper also gained in the wake of the deal. One banker close to the deal said "the (strong) book growth persuaded accounts to buy Indonesian paper more broadly, bringing the entire curve in".
But rivals claim some of the gains were the result of investors covering their short positions. Shorting was inevitable, charged critics, because rumours of the deal have been in the market for far too long, prompting investors to sell off existing holdings in order to benefit from the issue premium provided by the new programme. As evidence that existing ROI bonds had been sold short, one rival banker points out that the yield on the existing ROI 2014 went from 9.22% on January 6 to 9.83% by February 25, while the ROI 2018 yield went from 9.56% to 10.8% during the same period.
Critics of the deal have a point. Issuers that have delayed coming to market in the hope that markets would improve, have been disappointed. This is precisely what bankers told FinanceAsia they feared would happen earlier in the year. The news of an Indonesian sovereign issue has been rumoured for weeks, and has lead to a great deal of undesirable uncertainty. Understandably, it appears the Indonesian government was uncertain about how to time the market, and even delayed its budget discussions in the hope the situation would improve.
The timing of the deal has little to do with the lead managers, although they helped set up the GMTN programme at the beginning of the year and organised a non-deal roadshow to introduce it. Despite winning the mandate just before the Indonesian budget started its process through parliament last week, the underwriters had to wait until the budget had passed before determining the time of the deal with the issuer. The deal was eventually announced in New York on Wednesday morning and priced late morning on Thursday (New York time) -- a decent execution by any standards.
It is because of the decline in ROI bond prices since rumours of a possible deal started to trickle out about a month ago, that rival bankers argue the underwriters should have bullied investors into paying more for the new issue. One banker argues that the 'real' new issue premium on this deal is in the region of 100bp, based on where ROI paper was trading before rumours of the deal emerged. A source close to the deal put the 'official' new issue premium for the five-year at 50bp over the curve at pricing, and at 11bp over the curve 24 hours earlier. For the 10-year bond, he estimated 55/65bp over the curve at pricing, and 21/23bp over the curve 24 hours before.
Investors seemed to like the deal. "This was a very well managed, and very well executed deal which left a good feeling all around. There might well be some resentment from the banks which were not involved on the deal, since it was one bank less than usual," one investor comments. (The previous ROI issue in June last year involved Lehman Brothers, Deutsche Bank and Credit Suisse, and its offering in January 2008 was managed by Barclays, HSBC and Lehman.)
"The sell-off of secondary ROI paper in the run-up to the deal was pretty normal in an environment where the balance sheet and liquidity are very tight. Obviously, that means you are going to have a stronger sell-off than in recent years," he estimates.
The investor also gave short shrift to the argument that the ROI paper sell-off looked bad compared to the Republic of Philippines' (ROP) bonds. The ROP 2017 has tightened from 8% on January 6 to 7.35% on February 25.
"The situations in the Philippines and in Indonesia are very different, even though their bonds are often compared. The Philippines has a very strong bid from its domestic banks, thanks to the billions of dollars in remittances sent over by its overseas workers, for whom the deal carries zero risk weighting. That's not the case in Indonesia, where the onshore dollar market is much tighter. The investor base for ROI paper is much more dependent on the overseas bid, and therefore that has to price with a much bigger premium in order to clear," he says.
Ultimately, the high price paid by ROI is probably worth it. With commodity prices down, exports drying up, and collapsing US GDP, this is a lender's market. Following this deal, ROI is in a strong position to tap the markets again. That is an important consideration given the high proportion of foreign currency debt to total government debt (over 40% according to Moody's).
The five-year bond was sold predominantly to Asia (55%) and to funds (51%), while the 10-year went mainly to the US (50%) and to funds (76%). The deal is notable for being the biggest emerging market sovereign bond since the Czech Republic in June 2008; the largest sub-investment grade offering since April 2008; and the largest deal in Asia since Hutchison Whampoa's $5 billion dollar deal in November 2003.