Indonesia’s Bukit Makmur Mandiri Utama and Indika Inti Energi launched high-yield bonds this week, defying treacherous market conditions that prompted other Asian issuers to reconsider planned debt sales as demand for Indonesian risk remained high.
The new bonds demonstrate the strength of appetite for Indonesian credits despite a fall in the broader market in Asia this week. However, expensive premiums and secondary market volatility threatened to undermine hopes for a surge in new dollar issues from the country in the near-term, said bankers.
Indika Inti Energi priced a seven year $230m bond at par on Thursday to yield 9.75%, or 676.5bp over US Treasuries, via sole bookrunner Citi. The Reg S/144A non call four followed the end of a global roadshow in the US this week for the B2/B+ borrower. The deal attracted $850m of orders.
It comes hot on the heels of a $315m new issue from mining contractor Bukit Makmur Mandiri Utama, which launched its five year deal at a yield of 11.75% late on Wednesday. The 144A Ba3/BB- rated deal priced at par via bookrunners Deutsche Bank, Barclays Capital and ING and printed in the middle of earlier price talk of 11.5%-12%. However, the new notes fell to 98.5 on the break and recovered slightly to 99 at the end of Thursday despite the $900m order book.
By contrast, the Indika deal came in line with price guidance set on Tuesday at 9.75% despite the sell-off in Asian credit markets and global equities in the second half of the week. The 2016s traded up to 100.25 on the break before softening to 99.75 at the end of the day.
Buma was heard to have increased a $250m four year loan to $285m this week thanks to a late commitment from Farallon Capital, a US hedge fund. That move dictated the final size of the $315m bond as bankers had set a combined target of $600m to finance the buyout of Buma by Northstar through Jakarta-listed Delta Dunia.
Credit jitters
Bankers were quick to compare and contrast both deals this week as the latest indicators of appetite for Indonesia risk.
A banker close to the Indika transaction said: "Subsequent to releasing initial price guidance two days ago, there was a meltdown in credit and equities and all new issues traded down, including Buma. So the Indika deal was well executed and well priced."
Investors demanded a premium for Buma’s debut dollar bond since the proceeds are for acquisition purposes, said a banker on the deal. "This was a more difficult story to sell since acquisition always involves risk given a transfer of ownership."
Indika is better-known, having sold $250m of 8.5% 2012 notes in 2007. "People have known Indika for years and that confidence makes all the difference," said a portfolio manager in Singapore. "There was an expectation this would come at 9.5% — and two weeks ago it would have been close to 9% — but with the weakness in the markets 9.75% was the right price."
In September, Citi acted as sole agent for Indika on a tender offer for its existing bonds. As a result of the offer, the secondary trading levels reflect a 50bp pick-up and the fair value of the outstanding cash bond stands at around 8.7%, said a banker on the deal. The 2016s represent a 100bp extension on the issuer’s interpolated yield curve.
Asian investors snapped up 68% of Indika’s deal, the US 18% and Europe 14%. Funds purchased 75%, publicly-listed banks 8%, private banks 14%, and insurance firms 4%. Asset managers and hedge funds dominated the Buma trade with 59%, public banks 28%, retail banks 11% and others 2%. US and Asian accounts dominated the order book.
PLN stays under cover
Both deals came as Perusahaan Listrik Negara, Indonesia’s state-owned electricity distribution utility, delayed the launch of an expected dollar benchmark via Barclays Capital and UBS this week due to poor market conditions. PLN sold 10 year bonds worth $750m at the start of August, paying a coupon of 8% and a spread at re-offer of 499.6bp over Treasuries, and had considered a 10 and 30 year new issue, according to fund managers briefed on the sale.
At the time, this repriced the borrower’s yield curve by around 35bp-40bp, said a banker on the deal. However, its 2019s widened by as much as 30bp this week as markets weakened. The leads now face a challenge to price a new deal amid the secondary volatility while meeting the issuer’s competitive pricing demands that triggered its return to markets for the second time in two months. No official guidance had been released by mid-way through US morning hours on Thursday, prompting speculation that PLN would delay until at least next week.
Meanwhile, Chandra Asri, the Indonesian petrochemical company, was set to complete a global roadshow in the US on Friday ahead of a high yield deal valued at around $300m via DBS and Deutsche Bank.
Standard & Poor’s on October 23 revised its outlook on Indonesia from stable to positive, citing the BB-minus rated borrower’s stable economic and political environment. This is the latest sign of enthusiasm for Indonesia, which has been praised for its economic policy reform efforts, principally led in recent years by finance minister Sri Mulyani Indrawati. Spread compression for sovereign paper in recent months, the country’s buoyant growth and low US interest rates have helped drive high-yield Indonesian borrowers to enter international markets.
Coal miner Bumi Resources is working on a benchmark-sized deal via Credit Suisse and Deutsche Bank, fund managers said, while oil and gas firm Medco Energi is also considering a dollar debt sale, said to be worth around $300m.
Helmi Arman, bond strategist at Bank Danamon in Jakarta, said more Indonesian borrowers would come to the market to capitalise on the newfound global exuberance for the southeast Asian economy. The bulk of this corporate issuance would come from commodity producers and exporters that have the bulk of their revenues in dollars, he said. This would allow issuers to benefit from the liquidity in the global bond markets without triggering "a mismatch between their assets and debt liabilities".
The dollar market can also offer some cost advantages. High rated Indonesian borrowers typically pay a 200bp premium to the sovereign for rupiah bonds. The five year rupiah-denominated sovereign benchmark was this week trading at 9.5%, so a standard five year rupiah corporate bond for top-quality issuers yields around 11.5%, said Arman.
However, Jean-Charles Sambor, head of Asia research at the TCW Emerging Market Fixed Income Fund in Los Angeles, cautioned: "All the good news about Indonesia has been priced in and now there is huge room for disappointment."
This underscores the battle leads have in balancing expectations of Indonesian corporate borrowers to issue at historically tight levels relative to the sovereign, with growing investor fears that the rally in sovereign credit spreads may be running out of steam.