Mandiri cleans up

Indonesia''s largest bank launches its most successful international bond deal to date.

Rated five notches lower than the Republic of the Philippines, Bank Mandiri, nevertheless, managed to price 50bp tighter last Friday on the completion of a $300 million bond deal. The B-/B3 rated Reg S transaction was upsized from $200 million and is likely to be increased again to $360 million sometime this week if Bank Indonesia gives its approval for the exercise of a 20% greenshoe.

Books were also closed early by lead managers Credit Suisse First Boston, UBS Warburg and joint-lead Mandiri Sekuritas, after orders came in for just shy of $1 billion. Pricing was not surprisingly fixed at the tight end of the indicative range and was much more aggressive than the market had originally been anticipating when the deal was launched a week earlier.

With an issue price of 99.482%, the five-year deal has a coupon of 7%, yield of 7.125% and spread of 425bp over Treasuries, equating to 383bp over Libor. At the time of pricing, the bank's December 2006 FRN was trading at 350bp over Libor and its August 2012 10-non call five sub debt issue at 550bp over Libor. The new senior deal has, therefore, priced 167bp tigher than the sub debt deal. Many analysts believe this level represents fair value and had been expecting a lesser 125bp to 150bp differential.

By contrast, the BB+/Ba1 rated Republic of the Philippines has an April 2008 benchmark bond outstanding. At Asia's close Friday, this was yielding 7.62%, equating to 477bp over Treasuries, or 442bp over Libor.

Mandiri's distribution pattern highlights why the bank was able to hit such aggressive targets. With participation from 117 accounts, there is a geographical split of Asia 83%, Europe 15% and offshore US and Australia 2%. The Asian component sees Singapore take 56%, Indonesia 20% and Hong Kong 7%.

By investor type, retail accounted for 42%, asset managers 34%, banks 19%, insurance companies 4% and corporates 1%.

As with both of Mandiri's previous two dollar bond issues, there was huge onshore and offshore demand from Indonesian investors, with a particularly strong private banking emphasis this time round.

However, as Mandiri CFO Keat Lee comments, "We did have quite a lot of demand in Europe as well. With every deal, we've tried to widen the investor base and we're very, very pleased with the success of this deal."

Observers attribute strong demand to a combination of factors. Firstly, it is clear investors have cash to put to work and little new supply to invest in. Secondly, there has not been a quasi-sovereign benchmark from Indonesia in the five-year sector since the Asian crisis.

Unlike the previous sub debt deal of July 2002, the new deal is zero risk weighted no matter whether it is held on a bank's trading or investment book. This would give it enormous appeal to local banks, many of which were also said to have found the 10-year final maturity of the sub debt deal unappealing.

Where retail investors are concerned, bankers say the deal was felt to have an attractive pick-up relative to the sovereign. And for any investor that participated in the July 2002 deal, Mandiri has demonstrated that accounts will make money in the secondary market. The deal has tightened nearly 200bp in the space of just over eight months, having been priced with a 10.625% coupon, to yield 747bp over Treasuries.

From the outset the leads were confident that the combined effect of technical factors prevailing in the market and credit fundamentals would propel the deal to success. Credit analysts also believe that Indonesia should be upgraded from B3/CCC+ at some point this year, underpinning secondary spreads even further.

As Deutsche Bank wrote in a recent research report, "We see Indonesia's sovereign rating as potentially being raised to B2 by Moody's and B- by S&P by end 2003. We think Indonesia's claim that it will not approach the Paris Club in 2003 for a fourth time is credible.

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