Indonesia returns in euros

Sovereign makes its second foray into euros to extend its maturity curve and diversify investor base.

The Republic of Indonesia returned to the euro-denominated bond markets for a second outing on Thursday with a €1.25 billion bond deal.

The new transaction follows a debut €1 billion debut offering almost one year ago.

However, in a sign of how subdued markets have become over the past few months the new 10-year issue attracted an order book of €2.4 billion compared to €6.7 billion this time last year.

After setting out with initial guidance around 260bp over mid-swaps the leads were able to bring pricing in by 10bp. A new 2025 deal was priced at 98.507 on a coupon of 3.375% to yield 3.555%, equating to 250bp over mid swaps, or 281.4bp over Bunds.

Distribution was heavily skewed to the US, where the credit has long had a strong following. Of the 135 accounts that participated 37% were from the US, 13% from Asia, 7% from Indonesia, 17% in the UK, 9% from Germany and Austria, 8% from Scandinavia and Switzerland, with the remaining 9% from the rest of Europe.

By investor type, the split saw 66% allocated to fund managers, 16% to banks and private banks, 9% to insurance and pension funds, and 9% to central banks and sovereign funds. 

The Baa3/BB+ rated sovereign's existing €1 billion 2.875% 2021 deal was trading on a mid-yield of 2.595% yesterday. This means it has paid up 96bp to extend its curve out by four years - a point not occupied by many other emerging market sovereigns in euros.

The nearest comparable is the Baa3/BB+ rated Republic of Turkey, which has the same split rating as Indonesia. However, while Turkey is on negative outlook from Moody's and Standard & Poor's, Indonesia is on stable outlook from Moody's and positive outlook from S&P.

Turkey's longest-dated euro-denominated deal is a 4.125% April 2023 deal, which was bid Thursday at 3.19% or 226.9bp over mid-swaps. 

The other close comparable is The Republic of Bulgaria. This has a one notch higher rating of Baa2 from Moody's and the same BB+ rating from Standard & Poor's, although the latter rating is on stable rather than positive outlook.

Its 2.95% September 2024 bond was trading Thursday on a yield of 3.17% or 208bp over mid-swaps. 

Indonesia's investors will be hoping that recent ratings momentum will feed through into secondary market performance. Standard & Poor's changed the sovereign's BB+ outlook from stable to positive in May, suggesting that Indonesia may finally follow the Philppines into the investment grade club.

In its assessment, S&P said that it could raise its rating over the next 12 months "if the government achieves its stated objective of improving the quality of expenditure.”

However, in a credit assessment published earlier this week, Credit Suisse strategist Kasper Bartholdy argued that both US Treasury and emerging market sovereign bond yields are poised to rise more sharply than current curves suggest.

He said that whereas falling oil prices have been the driving force for US Treasuries over the past year, the focus is now switching towards greater focus on tightening in the US labour market and signals from the Federal Reserve. 

Indonesia's central bank also released figures yesterday that showed the country's foreign currency debt stood at $302.3 billion at the end of May, of which $133.5 billion constituted sovereign debt and $168.7 billion private sector debt. This represents year-on-year growth of 5.95%. 

Joint global co-ordinators for its bond deal were Deutsche Bank, Societe General and Standard Chartered, with PT Bahana Sekuritas, PT Danareksa Sekuritas and PT Mandiri Sekuritas as joint bookrunners. 

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