Mandiri completes sub debt

The Indonesian bank sets a new record as it becomes the lowest rated ever to successfully raise dollar-denominated subordinated debt.

A $125 million lower tier 2 debt issue was priced on Friday in New York via lead managers UBS Warburg and Mandiri Sekuritas. Completion of the transaction shows just how far Mandiri has come since December when it raised $125 million from an FRN and became the first sovereign related credit to tap the international debt markets since the Asian financial crisis. But pricing and distribution of its new B3/CCC rated deal also shows just how far Indonesian credits still have to go before they are completely re-embraced by the international community.

Volatile global markets and a growing risk aversion have taken the shine off Asian high yield credit particularly among international investors. As a result, Mandiri had to fall back on the Asian bid, but did manage to diversify its investor base away from Indonesia.

Pricing came at 99.147% on a coupon of 10.625% and yield of 10.85% against a pre-marketed range of 10.75% to 10.875%. Equating to a spread of 747bp over five-year Treasuries, or 682bp over Libor, the deal offered a roughly 280bp pick-up to the secondary trading level of the bank's outstanding 2006 FRN, which has put and call options in 2004, but is illiquid.

Should the deal fail to be called in August 2007, the coupon will step up by 50% to final maturity in August 2012.

The most relevant comparable is Indofood's 2007 bond, bid at 99% to yield 10.64% or 725bp over Treasuries. In yield terms, Indofood widened only marginally in the week ahead of Mandiri's pricing, but like all high yield credits it blew out in spread terms, widening about 60bp.

Credit analysts believe Mandiri's pricing makes sense considering it opted for a wider international investor base and market conditions are sub-optimal. It is also not the cheapest outstanding deal among recent issues, since PT Medco's five-year fixed rate deal had breached the 11% yield mark by the end of last week to trade at 11.1%.

Observers say books closed 1.5 times covered with a distribution split, which saw 40% placed in Singapore, 33% in Indonesia, 15% in Europe and 12% elsewhere and mainly Hong Kong. By investor type, asset managers accounted for 38%, private banks 27%, insurance funds 14%, banks 14% and pension funds 7%.

There was no participation by US funds, although the deal had 144a registration and the bank met with about 10 accounts. As CFO Keat Lee comments, "The US market has been very volatile, so we're very pleased we were able to close our transaction. The market was much better when we launched the deal, but became very difficult towards the end and single-B rated paper widened by about 100bp."

Lee and his team of senior officials are all fluent English speakers and through consistent investor marketing have begun to win accounts over with their honesty and commitment to transparency. He is completely candid about the task they face. "We got the impression that investors liked Mandiri's story and are starting to look at Indonesia again, but our timing just wasn't that great," he says "But we're pleased that they at least took the time to see us, listen to our story and some of them are now starting to buy as well."

Back in December, investors required a lot more credit work before they would participate in a B-/B3 rated senior deal led by HSBC. Nevertheless, the deal was considered a successful market opener for Indonesia with participation from 21 investors, of whom 60% were located in Indonesia, 16% in Singapore, 17% Asia, and 7% Europe. By investor type banks predominated on 79% followed by private banks 13.4%, asset managers 4.4% and insurance funds 3.2%.

This time round, some Indonesian investors were said to have a problem with the 10-year final maturity even though the deal will almost certainly be called in five. It was, however, boosted by the central bank's decision to allow domestic banks to hold each other's subordinated debt with a 20% risk weighting, so long as it is placed on their trading books. If, on the other hand, they decide to hold subordinated debt on their investment books, then it has to receive the full 100% risk weighting.

Lee comments that Mandiri intends to take a very conservative stance towards its capital ratios. "We need to maintain surplus capital because trust and stability is very important for a bank like us," he notes. "Optimally we wouldn't want to fall below double the regulatory minimum. But because we've been able to keep ROE quite high, being strongly capitalized is not a problem for us."

At the end of March, Mandiri reported a high CAR of 27.26% largely because its asset base comprises such a large proportion of zero risk weighted government re-capitalization bonds (currently 60%). Lee says that within five-years, Mandiri is aiming for a one-to-one ratio of government bonds and commercial loans.

The bank has also begun to move a number of the government bonds onto its trading book and now holds 5% there, while 31% are available for the sale and the remainder are held to maturity. By contrast in 1998, 98% were held to maturity.

Lee further adds that the bank decided it wanted to tap the subordinated debt market because it is aware that there is a steady pick-up in maturities from 2004 onwards when Rp19.8 trillion fall due. In total, the bank has Rp153.5 trillion government bond on its books.

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