Indonesia's unsteady start to bond deals

Hopes of an Indonesian corporate debt revival have been running high in international bond markets since President Joko “Jokowi” Widodo assumed office in October but the window is not open for all.

Bank Indonesia’s new regulations aimed at limiting foreign exchange risk and reducing the leverage of local borrowers is partly to blame and could curb Indonesian high-yield issuers’ ability to access dollar bond markets, according to fixed income experts. So only high quality borrowers with visible cash flows and scalability will be able to access the market.

“With commodity prices firming up and oil prices having made a bit of a recovery, that all helps with investor sentiment,” Devesh Ashra, head of Asia debt syndicate at Bank of America Merrill Lynch, told FinanceAsia. “But I would stress to look at the pipeline on a deal-by-deal or company-by-company basis as opposed to trying to paint with a broad brush for the country.”

Since the start of the year, local companies have been required to hedge 20% their foreign liabilities and assets maturing within three to six months. For debt maturing within three months, companies must meet the minimum hedging ratio plus a liquidity ratio of 50%, according to a central bank circular. 

From 2016 onwards the hedging and liquidity ratio increases to 25% and 70%, respectively, and companies must have a minimum credit rating of BB- to engage in foreign funding, the BI circular shows. 

Some Indonesian companies, as a result, have been looking to reduce their exposure to offshore funding as the new regulations have made it costlier for these companies to manage their foreign debt. 

“We are planning to rebalance our debt,” Arya Suryawan, head of corporate finance division for Indonesian telecommunications company Indosat, told FinanceAsia in Jakarta, adding that he plans to reduce the company’s dollar debt, which accounts for 50% of total debt to 25% to 30% this year. “It’s cheaper in the long-run and it removes currency risk and reduces hedging costs.”

Ba1/BB+/BBB rated Indosat has an existing $650 million bond callable in July this year, according to Bloomberg. The borrower is planning to launch a rupiah bond in the second quarter of this year. 

Indonesia’s government is seeking to address vulnerabilities within the financial system, including the country’s stock of private sector external corporate debt, which has ballooned in recent years to a whopping $161 billion. In comparison, the government owes $134 billion externally, data from BI shows. 

“Given the global risks, the regulation on foreign borrowings is highly relevant today,” Juda Agung, executive director for economic and monetary policy department at BI, said at The Corporate Treasurer’s fifth annual CTCFO Summit in Jakarta on January 27.

Quality matters

Not all is rosy for Indonesian borrowers as some have struggled to price their debut dollar bonds. 

B1/B1/B rated Indonesian gas-fired power producer MAXpower opened books for a $250 million five-year non-call three note at an initial price guidance area of  11.75% on February 4 but failed to garner enough interest for it. On February 9, lead managers Goldman Sachs, JP Morgan and Standard Chartered cancelled the offering, saying that MAXpower was now looking at more favourable alternatives of funding, without elaborating further.  

Meanwhile, B1/B- rated Indonesian developer Duta Anggada Realty wrapped up roadshows for a Reg S five-year non-call three deal last November, but the issuer still hasn’t come to market. 

“We saw more investor discipline with some pushbacks as weaker names tried but have not yet printed,” Harsh Agarwal, head of Asia credit research at Deutsche Bank, said. “We also note the lack of clarity among the Indonesian corporates with regard to BI regulation on foreign currency borrowing — rating requirement being [from a] domestic or international [agency].” 

Given the backdrop, DCM bankers are still hopeful for a healthy — albeit spotty — issuance pipeline from Indonesian high-yield corporates as they try to refinance their dollar debt before the minimum rating comes into force.

Already there have been a few specks of activity, notably from local tower operators. BB- rated Solusi Tunas Pramata (STP) and BB rated Tower Bersama sold a $300 million five-year non-call three bond on February 12 and a $350 million seven-year non-call four bond on February 3 respectively. 

The issuance pipeline is also better than it was last year. According to Dealogic data, year-to-date Indonesian dollar-denominated bond volumes have touched $4.6 billion, which is slightly less than half the $10 billion achieved in all of 2014.

“Over much of the past two decades, Indonesia has been an attractive destination for bond investors,” said Aaron Russell-Davison, head of DCM at StanChart. “We do see a healthy corporate pipeline in 2015, but compared with headlines and volumes from other geographies — India and China — Indonesia is likely to be the quiet achiever of the Asian high-yield bond markets.”