The Republic of Indonesia’s development as a sovereign borrower over the past two years has been little short of phenomenal. Once the pariah of the debt markets, Indonesia overtook the Philippines last year to become the largest international sovereign borrower in Asia. Another impressive international bond issue at the start of 2007 only highlights the country’s transformation.
Things were very different two years ago. On April 18, 2005, Indonesian sovereign bonds due 2015 peaked at a spread of 398bp over US Treasuries. Exactly two years later, the same bonds trade at 123bp over Treasuries, while newer bonds due in 2017 are quoted at just 130bp.
Such an impressive performance owes much to Indonesia’s improving economy and global demand for emerging markets risk, but its timing and execution have also improved markedly in the same period. Indonesia did itself no favours with debt investors when it launched a $1 billion, 10-year bond in April 2005, arranged by Citigroup, Deutsche Bank and UBS. The government got its money at an impressively narrow spread over US Treasuries, paying a yield of just 7.375%, but the bonds lost nearly 2% of their cash value on the first day of trading, leading investors to criticize Indonesia for pushing for an unrealistic price in a weak market.
That deal’s poor performance owed much to its unfortunate timing, as Indonesia encountered a market alarmed by rising Treasury yields and Ford and General Motors’ slide towards junk status. Indonesia’s newly issued 2010s only regained their launch level of 302bp over Treasuries in July that year.
The country’s second offshore bond of 2005 – a $1.5 billion issue across two tranches of 10 and 30 years – was again launched into a volatile market in October, and prices rose quickly after only a brief wobble. Citigroup, Credit Suisse First Boston and Merrill Lynch ran that deal, which comprised a $900 million, long 10-year note due January 2016 and a $600 million, 30-year bond.
Stunning
Set against that backdrop, Indonesia’s more recent international deals have been remarkable successes. Its $2 billion, 11- and 29-year bond, launched in March 2006, was a stunning success, raising over $8 billion of orders and capturing the imagination of the world’s emerging markets investors.
Led by Barclays Capital, JP Morgan and UBS, the deal was Indonesia’s largest overseas debt sale, and the largest dollar bond from non-Japan Asia since Hong Kong ports to telecoms group Hutchison Whampoa’s $2 billion, 2014 deal in November 2003. Indonesia also secured cheap funding relative to its existing outstanding bonds as investors bought into its improving economic profile following president Susilo Bambang Yudhoyono’s fuel subsidy cut.
Indonesia’s return in February 2007 was equally impressive, as the sovereign issued $1.5 billion of 30-year debt at its lowest ever headline coupon – the bond was priced to yield 6.75% off a coupon of 6.625%, and was arranged by Citigroup, Deutsche Bank and UBS. Some 260 investors placed orders worth over $6 billion.
Growing awareness
Bankers who have worked with Indonesia on these deals attribute its recent improvement to the growing savvy of the government’s funding officials.
“The government has done a fabulous job of building credit momentum,” says Michael Luk, head of cross-border debt capital markets for Asia at Deutsche Bank in Hong Kong. “The funding team communicated the government’s objectives and funding requirements clearly to the international community, and the finance minister was involved on some of the most important legs of the latest roadshow. The government also took advantage of the wide international audience to update investors on the continued improvement of the Indonesian credit story.”
Other bankers echoed this sentiment, praising finance minister Sri Mulyani Indrawati’s understanding of market dynamics, as well as her ability to communicate with investors. Praise for Indonesia’s funding strategy, however, is by no means unanimous.
“Indonesia is an improved borrower, but its ability to time a deal is still constrained by its lack of an SEC [Securities and Exchange Commission] shelf, which means it has to document and roadshow every global bond it issues, and that leaves it susceptible to changing market conditions,” says one debt capital markets banker who worked on an earlier sovereign deal.
Nonetheless, Indonesia’s improving economy – Standard & Poor’s upgraded its sovereign rating from B+ to BB- in July 2006 – has also allowed it to attract a wider range of debt investors, leaving it less reliant on any one sector.
“Indonesia’s funding needs will continue to grow, so it makes sense for the country to broaden its investor universe,” says Luk at Deutsche. “More investors are buying into the Indonesian story, and their international investor base has developed substantially over recent years.”
In the domestic markets, too, the government’s efforts to broaden its investor base have paid off, as the introduction of retail notes in 2006 demonstrates. Indonesia sold Rp3.28 trillion ($220 million) of three-year bonds in August last year in its first government bond sale targeted at retail investors, taking advantage of surging liquidity in the rupiah bond market to partially fund its budget deficit onshore.