Indonesia's sukuk

Indonesia's $1 billion sukuk rides on hopes of upgrade

Indonesia's new seven-year bonds trade up initially but slip in reaction to the guidance released on PLN's bonds.

The Republic of Indonesia early Tuesday morning priced a $1 billion seven-year sukuk, riding on investor optimism that the country could be upgraded to investment-grade status soon.

The guidance was released in the area of 4.25% on Monday morning and the bonds priced at a profit rate (which is similar to a yield) of 4%, at the tight end of the 4% to 4.125% final guidance.

While Indonesia is still rated Ba1 (stable) by Moody’s and BB+ (positive) by Fitch Ratings and Standard & Poor’s, just one notch shy of investment grade, investors are clearly taking the view that the sovereign will be upgraded. The yield it paid was significantly less than the 6.29% yield that Italy paid for its €3 billion ($4 billion) five-year bond auction on Monday. Italy is rated A2.

By the time the deal was announced on Monday, the leads — Citi, HSBC and Standard Chartered — had already amassed $750 million worth of anchor orders from Islamic accounts in the Middle East, Indonesia and Malaysia. They had specifically targeted Middle Eastern accounts, arranging extensive roadshows in Saudi Arabia, Doha, Dubai and Abu Dhabi in mid-October.

Indonesia opted to issue a rather odd seven-year tenor that enabled it to stretch out its maturity profile and yet capitalise on demand from Islamic investors, who prefer shorter tenors.

“The five-year tenor is where there is deepest liquidity from Middle Eastern investors,” said one person familiar with the deal. “But Indonesia didn’t want to do another five-year bond. A 10-year bond was seen as too long for Islamic accounts so we targeted a seven-year bond,” he added.

Investors usually demand a higher new issue premium for sukuk deals as they are unable to buy credit default swap protection against their default. Additionally, as Indonesia’s sukuk had an ijarah (sale and leaseback) structure, it could not be included in the J.P. Morgan JACI Index, which meant that some investors who track the index were probably not keen on buying the bonds. Despite this, Indonesia was able to print a tightly priced deal offering a new issue premium of about 20bp.

The sukuk was mandated to Citi, HSBC and Standard Chartered more than a year ago, but Indonesia then decided to shelve its plans. It sent out a fresh RFP for the deal this year and ended up mandating the same banks.

The new Indonesia 2018s initially traded above the par issue price to 100.45, but slipped to 99.85 at noon on Tuesday. Late Tuesday morning, Indonesian bonds, particularly the sovereign and Pertamina, fell in reaction to news that Perusahaan Listrik Negara was in the market with a benchmark 10-year bond, arranged by Barclays Capital and Citi. The initial guidance, which was released in the area of 5.875% late Tuesday morning, was described as “cheap” by two bankers away from the deal.

The Indonesia 2021s were quoted at 4% which meant that based on the initial guidance the new PLN 2021s were offering a spread of 187bp versus the 100bp to 125bp spread that PLN usually trades over the sovereign, said one rival banker. 

Its latest seven-year deal is Indonesia’s second sukuk. It issued its maiden $650 million five-year deal, which offered a coupon of 8.8%, in April 2009. Barclays Capital, HSBC and Standard Chartered were the arrangers. 

The deal gathered an order book of $6.5 billion from 250 accounts. Middle East and Islamic investors were allocated 30%, US investors 8%, European investors 18%, Asian investors excluding Indonesia 32% and Indonesian investors 12%. Funds were allocated 59%, banks 17%, central banks and sovereign wealth funds 11%, private banks 7% and insurance companies 6%. The bonds mature on November 21, 2018.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media