Mandiri returns Indonesia to bond markets

The state-owned bank sets a new benchmark for Indonesian debt with its debut FRN.

Though small by global standards, the increased $125 million FRN completed yesterday (Thursday), marks an important step forwards for the small band of Indonesian borrowers capable of accessing the international capital markets. As the first sovereign related credit to tap the dollar markets since the Asian financial crisis, Mandiri has provided a key indicator of how investors view the country's credit.

For the bank itself, the deal has also been viewed as a precursor to its scheduled IPO next year and management are said to have returned from roadshows extremely happy to have executed a deal which proceeded without a hitch from start to finish.

Initially targeted as a $100 million transaction, the B-/B3 rated deal was increased by $25 million under the lead management of HSBC. With a five-year final maturity and three-year call and puts, pricing came at 99.735% with a coupon of 590bp over Libor to yield 600bp over. Co-managers for the Reg S deal are Barclays Capital, ING Barings and Mizuho International.

A total of 21 investors are said to have participated, with a distribution split which saw 60% of paper allocated to Indonesia, 16% to Singapore, 17% to the rest of Asia (Hong Kong and Japan) and 7% to Europe including the UK. By investor type, the book was split 79% banks, 13.4% private banks, 4.4% asset managers and 3.2% insurance funds.

The credit was marketed as a leveraged sovereign play and as such offered a roughly 100bp pick up off a relatively flat curve to the government's outstanding Yankee bond. On the day of pricing, the Republic's $400 million 7.75% August 2006 bond was bid 490bp over Treasuries, while Bank Negara Indonesia's (BNI) 7.625% February 2007 bond was bid at 660bp over.

Bankers say that investors were willing to accept a yield inside of BNI levels because the latter bank is seen as one of the weaker constituents of the four state-owned banks that were merged to form Bank Mandiri in July 1999.

A number of observers had initially thought that Mandiri would have a tough job on its hands and attitudes hardened after Indonesia began to accelerate a rescheduling of its concessionary debt with the Paris club. However, the Paris club negotiations do not include commercial debt and the small size of the deal combined with pent-up demand from banks with lines available to the country proved to be key components of it success.

Positioning of the credit as a "best of both worlds" play was also a successful strategic move. As such, Mandiri benefits from a blanket guarantee extended by IBRA (Indonesian Bank Restructuring Agency) over all of its debt including the new deal, but also has the freedom to operate along commercial lines.

During roadshows, management were keen to point out how successful they have been at reducing NPL's in relation to countries like Thailand, where levels still stand above 30%. Since December 1999, for example, Mandiri has reduced NPL's from 71.25% to 20.1% as of December 2000 and 12.7% as of end September 2001.

The bank's biggest challenge going forwards will be improving profitability and lessening its dependence on the government re-capitalization bonds which underpin its asset base. "Until the operating environment in Indonesia improves, Mandiri will seem more like an asset manager than a true bank," one observer concludes.

During the first half of 2001, the reported net profit of Rp1.5 trillion ($176 million) compared to Rp2 trillion for the whole of 2000 and a loss of Rp68 billion during 1999. During 2002, the bank has $580 million debt coming due, but has said that it has enough internally generated cash to pay the amount off.

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