The Republic of Indonesia returned to the international bond markets after New York's open yesterday (April 13) with a $1 billion 10-year deal via Citigroup, Deutsche Bank and UBS. After a three week delay caused by exceptionally difficult market conditions, the government was finally able to congratulate itself on getting the issue size it wanted if not the price.
Backed by an order book of $2.2 billion, a B2/B/BB- rate transaction was priced at 99.127% on a coupon of 7.25% to yield 7.375%. This equated to a launch spread of 302bp over Treasuries or 256bp over Libor. Fees were 10bp.
The government announced its intention to re-launch the deal early Asia time on Tuesday and went on to complete a 48-hour accelerated bookbuild that appears to have been fraught with difficulties in the face of a reluctant US investor base still smarting from crumbling EMG credit spreads particularly in Latin America. As such some wondered whether Indonesia was the right credit to try and restore confidence in Asia, or whether a lower beta, higher rated name from Korea with smaller size expectations would have been a better bet.
There has also some debate about the wisdom of any issuer printing in the current market even if the overall tone has improved slightly followed the release of the latest FOMC minutes on Tuesday night. Some believe the Indonesian government would have been better advised to wait and see if its credit spreads stabilize over the next month. Alternatively its brave decision to lead the way may have enabled it to take advantage of a small market window that will close down again next week when a large number of economic data releases are expected out of the US.
There is no doubt the government has printed a deal at far wider levels than it would have done six weeks ago when its outstanding March 2014 deal hit an all time record tight. At the beginning of March, the Republic's 6.75% March 2014 deal was being bid at 6.3% equating to a Libor spread of 140bp.
Taking into account 20bp on the curve, this means that a new deal could have potentially priced in a strong market around the 6.5% level without the need for much of a new issue premium.
By the time the government embarked on roadshows in the middle of the month, spreads were already widening. On the day it started roadshows on March 17, the 2014 bond was out to 6.6%, implying a new issue yield in the 6.8% to 6.9% range.
This was still within the government's price expectations. However, by the time roadshows wrapped up the following week, the Fed was starting to talk about inflationary pressures and the bond markets were falling apart. By this point the Republic was facing a yield north of 7% and on March 23, the government postponed the deal to await better market sentiment.
This has still not yet been reflected in its own credit spreads. The threat of new supply caused the existing March 2014 deal to soften 8bp between Tuesday and Wednesday. By the time the new deal priced on Wednesday night, it was being bid at 7% or 208bp over Libor. The new deal has consequently come at a 48bp premium in Libor terms.
But what it does have in its favour is a low underlying Treasury yield of 4.354%. This represents the tightest end of the 10-year's recent trading range of 4.4% to 4.65%.
This tightening was spurred by release of the FOMC minutes on Tuesday night, which have provided new impetus to the market. The notes show that while the Fed is concerned about rising inflationary pressures, it has no immediate plans to accelerate interest rate rises as some had feared.
"Although the required amount of cumulative tightening may have increased," it said, "members noted that an accelerated pace of policy tightening did not appear necessary at this time, as a degree of economic slack apparently remained, productivity growth would probably continue to damp increases in unit labour costs and prices, and inflation would most likely continue to be contained."
Many investment banks believe that Treasury yields are unlikely to stay at these levels for long and that were Indonesia to wait for another month or so, it could be facing even higher borrowing costs. Barclays for one is currently forecasting that 10-year yields could spike up to 4.9% within a one to three month time frame.
Indonesian government officials are also likely to have been conscious they still had some residual momentum they could take advantage of. Each new week of delay, on the other hand, would have seen this eroded further. And as bankers point out, next week may again prove volatile thanks to the inflation data scheduled to be released.
In the end the Republic attracted an order book of $2.2 billion with participation by 207 accounts. By geography, the deal split 18% US, 20% Europe, 10% Hong Kong 13% Singapore, 30% Indonesia, 10% other. The allocation to Indonesia was much higher than 2004, when just 7% was placed into the home market.
By investor type, banks took 38%, fund managers 38%, insurance companies 14% and retail 10%.
Initially it had been though that Indonesia might price on Tuesday night, but at this point there was a much smaller order book of $1.3 billion and one of the three lead managers on the US syndicate desk was urging a deal size of as small as $500 million and pricing as wide as 7.5%.
Their 'rationale' was based on the fact that US investors had failed to bite. However, Asian investors are said to have come in quickly on Tuesday and continued to show interest throughout Wednesday allowing the deal to come towards the tighter end of price talk between 7.25% and 7.5%.
Had the deal gone ahead at a reduced issue size and at the wide end of price talk, it would have sent disastrous signals back to the Asian marketplace. Instead, sense prevailed and the borrower was able to use its own investor base to leverage pricing back down to the tight end of the range.
Some will now ask how firm the final order book was and whether the hot money will evaporate if the deal does not open well. But bankers say that the low US turnout resulted in very small allocation to hedge funds, with most of the US accounts comprising real money investors.
Non syndicate bankers believe Indonesia has probably got the best deal it could in the circumstances and that it probably made the right decision to go rather than wait. Nevertheless, the Republic has managed to price at wider spread to Treasuries in 2005 (302bp) compared to 2004 (277bp) despite the fact that its credit fundamentals are inherently better.
The sovereign is, for example, now on positive outlook from all three agencies. The government also announced yesterday that it is revising its 2005 GDP forecast from 5.5% to 6.1% - its highest level since the Asian financial crisis.