Indonesia to return to the international bond markets

For the first time since the Asian financial crisis, a state-owned entity is preparing a dollar bond.

HSBC is believed to have won a mandate to launch a debut Eurobond for government-owned Bank Mandiri. What is expected to be a small-sized, three to five year issue represents a major strategic move for the bank as it prepares for listing on the Jakarta Stock Exchange next year and on a wider level, a first test of investors' faith in the Megawati government.

Since the financial crisis, there has been virtually no dollar debt of any kind from corporate or sovereign Indonesia. The ill-fated APP group managed to access the capital markets three times before it collapsed earlier this year, having launched a $403 million high yield bond for APP China via Morgan Stanley in early 2000, a $75 million receivables issue via Bank Boston in autumn 1999 and a one-year private placement via JPMorgan in summer 2000.

Other than this, there have been two small, short-term syndicated facilities for First Pacific-owned Indofood ($50 million and $75 million) and so far this year, one $20.6 million IFC co-financing for Sunsun Textile.

Winning a mandate from Indonesia's largest bank represents a major coup for HSBC, particularly as Credit Suisse First Boston is considered Mandiri's house bank and will be lead manager of its forthcoming IPO.

Country specialists believe that there should be ample demand for a small deal, particularly out of Singapore, where banks will have some credit lines for Indonesia and CCC+/B3-rated Bank Mandiri will be considered one of the Republic's most stable assets. Investors sounded out by the lead say that the deal is likely to be Reg S and listed.

It also seems likely to be pitched as a leveraged play on the sovereign and as such there are a couple of existing pricing benchmarks. The Republic itself has one outstanding issue û a $400 million 7.75% August 2006 issue with a current cash price of 93% and yield of 562bp over Treasuries.

From the banking sector, the main benchmark will be BNI's inaugural Yankee bond of January 1997, led by JPMorgan. This $145 million 7.625% 10-year subordinated debt issue due February 2007 was priced at 110bp over Treasuries.

It is currently bid at 540bp over Libor, based on a cash price of about 86% and yield of 11%. Since the beginning of the year, the deal has performed strongly, moving up about 20 points from a cash price of about 67% in early January.

Bank Mandiri also has benchmarks of its own in the Asian bank market, where two of its four constituent banks have outstanding FRN's. The Bank was formed in July 1999 through the merger of four state-owned banks û Bank Dagang Negara Indonesia (BDNI), Bank Bumi Daya (BBD), Bapindo and Bank Ekspor-Impor (BEI). It is also presently in discussions to buy Sinar Mas family bank, Bank Internasional Indonesia (BII).

BDNI has a $180 million FRN due November 2005 with a 2002 put option and issue spread of 80bp over Libor. It is currently trading on a cash price of 96% to yield 464bp over Libor. BEI has a $130 million FRN due September 2005 with a 2002 put option and issue spread of 80bp over Libor. It is also currently trading on a cash price of 96 to yield 574bp over Libor.

For investors, one of the main credit concerns with Mandiri will lie less with the bank's absolute levels of NPL's and more with the fact that its asset base relies very heavily on interest-bearing recapitalization bonds pumped in by the government at its creation. Of a total asset base of Rp223.7 trillion ($21.89 billion), for example, government bonds accounted for Rp137.8 trillion ($13.4 billion) and loans for only Rp51.19 trillion ($5.01 billion).

Over the first half of 2001, the bank reported that net income doubled from the same period the previous year, rising to Rp1.5 trillion ($176 million).

Proceeds from the new deal will be used to provide a better match for the bank's assets, which include a small dollar loan book. If successful, the deal should also provide the bank with international investor exposure and serve as a useful forerunner for its IPO.

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