Indonesian high yield corporates have stalled plans to sell US dollar bonds after ‘B’-rated Multipolar showed that global investors appetite for sub-investment grade debt is still tepid, say dealers.
Real estate companies Jababeka International, Modernland and Pakuwon Jati have been holding discussion with banks in recent weeks to sell US dollar bonds, having shelved their original plans in May when the global debt market closed, according to dealers.
These issuers keenly eyed Indonesian retailer Multipolar (‘B+’ Fitch, Standard & Poor’s [S&P]) in its bid to sell a US$200 million five-year debut on July 18 to gauge global investors interest for high yield credits. Yet, after Multipolar was forced to pay a 9.75% coupon and subsequently saw its bonds tank in the secondary market, these Indonesian companies have not got cold feet.
“These Indonesian real estate companies wanted to issue small- and mid-sized bonds back around May and began preparing paperwork for their deals, but that was before the June wobble. Then the market closed,” said the head of high yield at an Asian bank. “There was a lot of emphasis on Multipolar to use as a sort of benchmark for investor sentiment.”
Bankers away from the Multipolar deal say that investors hoped for a double-digit coupon, which they didn’t receive. And even offering a 300 basis point (bp) premium over two comparable bonds issued by Multipolar’s parent, Lippo Group didn’t help it in the secondary market.
Multipolar’s bonds traded down to between 98-98.5 the day after its issue, and continued to slide to about 96 by noon on July 26, to yield around 10.25%.
“The fact that Multipolar got done was positive for the market, but it was very small and it immediately traded poorly in the secondary market,” said the head of high yield for Asia at a global bank. “The willingness for investors to pile into new paper will be reduced – we haven’t had any high yield issuance for nearly two months, and the one deal that we did have traded poorly.
“Investors wanted double digit yields for Multipolar and they weren’t happy at 9.75%. So the guys which have been rumoured to come to the market since May are either rethinking the strategy or warming up to a more expensive premium,” he added.
The result was disappointing as bankers believed that, if any sector from Indonesia would be able to successfully tap the international market, it would be real estate companies. This is because property developers have a long cash cycle in which to raise money, which is conducive to larger bond sizes and longer tenors than three-to-five years.
These companies also come from a well-known sector where there are strong comparables in the dollar market. And because real estate firms have an ongoing need to break ground on new projects, buy new land or raise cash to acquire smaller developers, investors can expect companies to be regular issuers.
“There was a lot of appetite for companies earlier in the year. Lippo Karawaci’s 6.125%-bond touched the high 5% area right before the market wobbled, and Alam Sutera Realty issued a [seven-year] bond with a 6.95% coupon in March of this year after having sold a [five-year] 10.75% one [in March] of last year,” said the head of high yield at an Asian bank.
Appealing to investors
Jababeka International, Modernland and Pakuwon Jati were not the only Indonesian names to have been spooked.
One Southeast Asia debt capital markets (DCM) banker says that two or three other Indonesian companies in other sectors also launched discussions with banks in the lead up to Multipolar’s deal. They have also decided to hold off their bond sales until the market stabilises.
“Unfortunately Multipolar set a very unfavourable benchmark for everyone. It went on the road and guidance seemed to be in the low-9% area but then it priced at 9.75%. That’s a big difference,” said the DCM banker. “We’re about 2% away from where we need to be in pricing before these Indonesian high yield issuers reconsider the market.”
He predicts that no high yield Indonesian company will issue a US dollar bond until September at the earliest. Part of the reason why Multipolar didn’t attract as many investors is because it launched a Reg-S deal, excluding US investors. Issuers will need American support when investors return from their summer breaks.
“What this really indicated is that you need a 144a deal that attracts both US and European investors, which means that the earliest time that the market could be open is in September,” said the DCM banker. “This also gives companies a chance to put together their half-year numbers and complete their earning seasons. They can go out on a clean slate.”
In the meantime, investors will be keener for higher-grade deals. Both Indian Oil (‘BBB-‘ Fitch, ‘Baa3’ Moody’s) and Korea Gas (‘AA-‘ Fitch, ‘A1’ Moody’s, ‘A’ S&P) saw more successful issues just days after Multipolar marketed its bonds. Korea Gas was a Reg-S, 144a deal.
“Multipolar chose the wrong day. The market conditions weren’t that great and sentiment wasn’t great. Sentiment was a lot better for Indian Oil and Korea Gas,” said the DCM banker. “This has been another sign that state-owned and investment grade names are the ones that will get successful deals done.”
Citi, Deutsche Bank and Nomura were joint bookrunners on Multipolar’s bond.