Asia’s last dollar bond to be priced, Kexim’s $1bn 10 year deal in early September, seems a long time ago now. Companies and banks have continued to hit the road to pitch future issues, but — with the exception of the odd certificate of deposit — none have pulled the trigger.
The usual prescription for a market in this catatonic state is for a well known, highly regarded, investment grade borrower to save the day, selling a generous deal that tightens in the secondary market. That is usually enough to give the primary market a boost when investors are feeling drowsy, but not so useful when they are hiding under their desks in a state of panic.
Kexim was supposed to follow the script to perfection last month, selling a $1bn September 2021 deal that paid a new issue premium of around 30bp, a far cry for the negligible (and sometimes negative) new issue premiums the policy bank usually pays. But the bond quickly widened in aftermarket trading, and rather than re-open the market, the deal gave investors more evidence than ever that they should stay well away from new deals.
Are investors still as scared as they were when Kexim closed its deal? Have they now come out from under their desks for long enough to consider new issues? Indonesia’s Islamic deal will go a long way to telling us.
The sovereign is aiming for between $500m-$750m, although this range could still be adjusted before launch.
The ability of the country to sell the bond is also not in question. Indonesia is one of the best-regarded frequent bond issuers in Asia, and should not have much trouble finding enough demand to push the bond to completion.
But the ease of execution, and the performance of the deal in the aftermarket, will give us a big clue as to how confident other potential bond issuers should be about raising cash.
The last time Indonesia sold an Islamic bond was in April 2009, when it issued a $650m deal. That transaction got almost $5bn of orders and the bond traded strongly in the secondary market, despite aggressive cuts in price guidance during execution. Indonesia’s most recent conventional bond issue, a $2.5bn issue in April, got almost $7bn of demand.
No one should expect demand for the country’s latest issue to approach those levels, but if the lead managers are forced to price the deal with a lacklustre order book, we will know that few companies or banks will have a chance of raising money for some time.
Investors and bankers will next look at how the deal performs in the secondary market. Kexim had a good chance of injecting some confidence into the market last month, when it took its familiar role of market-opener. But the generously priced deal widened rapidly, and all optimism quickly faded into nothingness. Aftermarket performance is an unpredictable variable — and not one we should expect bankers to be able to control — but right now, it is as important a variable as any other.
The bond market has been in a dire state for the last few months, but after recent tightening of spreads, it has had a chance to regain its footing. Indonesia’s pending deal will be a good test of whether the market can continue to walk straight for some time — or whether it will once again fall into a ditch.