Corona bonds

Indonesia’s pandemic bond debut shows promise but widespread adoption is doubtful

The sovereign has sold its largest-ever bond. This should help protect the economy from the coronavirus and finances a significant portion of its stimulus package. However, the structure is unlikely to be utilised globally for political reasons.

European sovereigns might still continue to argue about the need to sell coronabonds, but the Republic of Indonesia has no such qualms. Last week, April 7, it sold an impressive $4.3 billion three-tranche bond, proceeds of which will partly be used to fight the COVID-19 pandemic.

Not only is the senior secured deal the country’s first coronabond, it is also the largest from the sovereign and, with a 50-year tranche, the longest tranche ever seen in Asia.

Despite market turmoil, the issue was launched after the government had announced a Rp405 trillion ($24 billion) stimulus package. It was “as good as time as any to do a COVID-centred bond,” said one banker close to the deal.

Rather than follow a roadshow, Indonesia had held several general investor calls over the past few weeks to talk about its COVID-19 care package and in fact, didn’t have a specific call for the issue.

The deal went out Asia morning with a 10.5 year tranche at an initial price guidance of 4.15% area; a 30.5-year tranche at 4.55% area; and a 50-year tranche at 4.9% area. There were no external comps on the deal as Indonesia has a solid curve.

By New York close, books for the issue, which has an expected rating of Baa2/BBB/BBB in line with the sovereign, had swelled to $11 billion. The $1.65 billion 10.5-year went at 99.573 to yield 3.9%; the $1.65 billion 30.5-year went at 99.150 to yield 4.25%; and the $1 billion 50-year went at 99.009 to yield 4.5%.

Although this was up to 40 basis points (bp) inside initial guidance, the deal still came with a generous new issue premium over the existing (and, for the 2070s, implied) curve. It was between 45bp and 60bp “depending on how you look at secondary pricing,” said the banker, though the premium was comfortably inside that of similarly rated sovereigns.

While the 30-year tranche was grabbed by Asian lifers, in particular those from Taiwan, attention was on the 50-year tranche which went mostly to pension funds and asset managers in the US.

“[The tranche] was designed for US investors who were chasing yield and duration at a time when base rates are at an all-time low,” said the banker.

In the secondary market, before markets closed for the long weekend, the two longer tranches had traded down slightly at around 97, while the 10-year was at par.

Citigroup, Deutsche Bank, Goldman Sachs, HSBC and Standard Chartered were joint bookrunners with PT Danareksa Sekuritas and PT Trimegah Sekuritas Indonesia as co-managers.

REMOVAL OF DEFICIT LIMITS

The government said that proceeds would be used to finance COVID-19 relief and recovery efforts for the Republic to contain the virus and to mitigate its impact on Indonesia

Although Indonesia has only 3,842 cases of the illness at the time of writing, according to John Hopkins University, the real figures are considerably higher.

National Disaster Mitigation Agency (BNPB) spokesman Agus Wibowo has said that there is a mismatch between the number of confirmed COVID-19 cases published by the government and those published by regional administrators

On Thursday, 9 April, Andreas Harsono, senior Indonesia researcher at Human Rights Watch, said in a statement that: “The Indonesian government needs to ramp up testing to know the true extent of the coronavirus outbreak in the country.”

This is going to be tough to do. Testing remains limited, with fewer than 20 sites to process tests for the entire country of 274 million.

As well as the new $24 billion relief package, the government has also abandoned fiscal rule legislation which was adopted back in 2003. This limits the deficit to 3% and debt to 60% of GDP.

The deficit is now expected almost to double to more than 5% of GDP which the government has said that it intends to fund with more debt issuance.

“While having maximum wiggle room at a time of urgent humanitarian situation is crucial, a firmer path towards longer-term consolidation would be helpful to anchor market buy-in,” said OCBC analyst Wellian Wiranto in Singapore.

The market certainly remains cautious about the outlook on the economy.

“The speed with which any stimulus measures can be implemented, and the effectiveness with which additional fiscal space is used to stem deterioration in corporate balance sheets and support private consumption, will determine the ability to stem the ongoing declines in the rupiah and bond prices,” said Anushka Shah, vice president of the sovereign risk group at Moody's.

The 20% drop in the rupiah against the dollar since early February and the spike in bond yields will have economy-wide effects, particularly if prolonged, she added.

Indonesia's 10-year bond yield has jumped from 6.85% at the start of the year to 8.08%, according to MarketWatch

The conclusion from regional analysts is that government measures will at best buffer the impact of the shock, rather than reverse or resolve it.

FUTURE ISSUANCE

Further issuance of similar bonds in Asia are expected. “We have received a lot of inquiries on the issuance of pandemic bonds particularly from SSAs [sovereigns, supranationals and agencies],” said the banker.

But scepticism remains. Although the Africa Development Bank printed a $3 billion three-year social bond to fight COVID-19 at the end of March, there has been pushback in Europe against issuance.

“I don’t believe we should have common debt because of the situation of our political union and that’s why we reject this,” said German Chancellor Angela Merkel bluntly at a press conference last week.

The concern there is that richer European countries will yet again end up stuck with the bill for the debt of their poorer European neighbours.

Elsewhere, there are concerns about the structure of pandemic bonds.

The first one was launched by the World Bank in June 2017. The $425 million deal came from the International Bank for Reconstruction and Development in the aftermath of the Ebola outbreak in 2014.

It has come in for criticism as favouring investors rather than those that the bond is supposed to help and only begins to payout after the disease has already spread.

Transparency has also been an issue in the past but the structuring of the deals has improved and issuers are beginning to look at ICMA-compliance to get a second opinion.

“So long as the value of the bond that you're issuing is lower than the number of projects and assets that you have on the other side. That is all you need to do,” said the banker.

“When you have a bond, which is $4.3 billion, and a package which is about $24 billion, from an investor perspective, you're comfortable that this will be fully allocated,” he added.

¬ Haymarket Media Limited. All rights reserved.

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