Indonesia sells landmark $2b sukuk

The Southeast Asian nation prices the largest single-tranche Islamic bond ever despite volatile market conditions, obtaining a total order book of $6.8b.

The Republic of Indonesia sold a $2 billion 10-year Islamic bond, or sukuk, during Asian morning hours on Friday, pricing the world's largest-ever single-tranche shariah-compliant offering.

Rated Baa3/BB+/BBB-, the Reg S/144A note priced at 4.325%, 22.5 basis points tighter than its initial price guidance area, according to a term sheet seen by FinanceAsia.

The sukuk, which is also Indonesia's largest dollar Islamic bond ever, was sold through special purpose vehicle Perusahaan Penerbit SBSN Indonesia III and under the sovereign’s existing trust certificate issuance programme, the limit for which was raised to $10 billion in April from $5 billion previously.

Due to strong investor demand the deal traded above par in early trade at 100.20, a source close to the deal said. That's in spite of a wobbly few weeks trading for global markets due to mixed economic data and mounting uncertainty as to when the Federal Reserve will start to hike US interest rates.

The latest set of weekly data shows more Americans sought unemployment aid but the number of applications remains at a historically low level that is consistent with a healthy job market. Weekly applications increased 10,000 to 274,000, the Labor Department said May 14. The four-week average, a less volatile figure, fell to a 15-year low of 266,250.

The yield on the benchmark 10-year US Treasury note has crept above the 2% level in the last few weeks from the 1.9% level seen in the first quarter. It eased 6bp overnight to trade at 2.19% in Asian trade, according to Bloomberg data.

Robert Pakpahan, the director general of the Indonesian Finance Ministry’s debt management office, said in October that the country planned to “frontload” the sale of bonds denominated in dollars, euros and yen ahead of an expected US rate hike in 2015.

Asean’s biggest economy by GDP plans about Rp450 trillion ($37 billion) of debt issuance in international and local bond markets this year, similar to 2014’s record-breaking level, Pakpahan said at FinanceAsia’s biannual Borrowers’ and Investors’ Forum. 

Large order book

Following a series of investor meetings around the globe, the transaction was well received and generated a large order book of over $6.8 billion from 240 investors.

Islamic and Middle Eastern investors subscribed to 41% of the notes, followed by USA 21% and Europe 16%, Asia ex-Indonesia 12% and Indonesia 10%, according to a source close to the deal. Banks purchased 42% of the paper, followed by fund managers 39%, central banks 15%, insurers 2% and private banks 2%.

The assets used to back Indonesia's latest sukuk includes state-owned assets including land and buildings (51%) and project assets, which are under construction or to be constructed (49%).

Three quarters of the way there

Indonesia's latest bond issue takes the total number of international sukuk sales from Asian issuers so far this year to $4.77 billion, which is close to about 75% of 2015's full-year record, according to Bloomberg. Malaysia was the last Asian sovereign to sell dollar-denominated sukuk in April, when it priced a $1 billion 10-year Islamic bond at Treasuries plus 115bp.

Indonesia’s last 10-year shariah-compliant note priced at 4.35% back in September when it raised $1.5 billion. 

The Government of Hong Kong is next in line to raise an Islamic bond after ending its global investor roadshow on May 21. The sovereign could launch its second sukuk as early as next week.

Garuda Indonesia, the national airline of Indonesia, is also mulling a sukuk issuance. The company embarked on its global investor roadshow on May 19, which will end in London on May 26, according to sources familiar with the matter.

CIMB, Dubai Islamic Bank, HSBC and JP Morgan were the joint bookrunners on Indonesia's latest sovereign offering. 

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