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Indonesian success story: Inalum bolsters bonds

By Addison Gong
14 Nov 2018

Indonesia Asahan Aluminium’s recent $4bn bond, which pulled the country’s quasi-sovereign curve tighter, has given a much-needed boost to Indonesian issuers in the offshore market.

At the end of October, Indonesian state-owned oil and gas company Pertamina surprised the market by pulling a tender offer for close to $2.25bn of notes due in 2021 and 2022. The cash tender, which ended on October 25, was contingent on the issuer raising enough, not just to fund the tender but also to have $500m left over for general corporate purposes.

The plan was eventually cancelled. There is a good chance Pertamina would have been able to hit its size target but not at a price it was happy with. A week later, it raised $750m from a 6.5% 30 year bullet, paying 10bp-25bp of new issue premium.

This was not a terrible result at the time, highlighting the uncertainty gripping Asia’s bond market more than any credit-specific problems. But when Indonesia Asahan Aluminium (Inalum) came to the market last week, it offered a stark reminder that staggering successes are still possible, even in this market.

The state-owned mining company and first-time dollar bond issuer initially offered attractive yields to hit its $4bn size target, but after the overall order book touched $20bn, it managed to tighten its longest-dated tranches by 50bp and 62.5bp. Inalum printed in four different tenors including a $750m 30 year.

Some bankers sniffed that Inalum paid up. But the deal appears to have restored confidence in Indonesian bonds, a market that underperformed this year because of a strong dollar, rising rates, volatile commodities prices and the turmoil in emerging markets. 

Back when Pertamina was in the market with its tender and new issue, there was heavy supply pressure. State-owned electricity distributor Perusahaan Listrik Negara (PLN) had closed an over $1.57bn dollar and euro bond sale just days ago, and the market was braced for Inalum’s multi-billion deal.

The highest quality Indonesian corporate bonds, those by quasi sovereigns, widened by as many as 50bp-60bp in the long end since the beginning of the year. But with the likes of Pertamina and Inalum out of the way, and no visible quasi sovereign issuance in sight for the rest of 2018, Indonesian bonds are now due a rebound.

That is already happening. Inalum bonds rallied in the secondary market after pricing, and also tightened the Indonesian quasi sovereign and investment grade curves, while giving a boost to the recent Pertamina and PLN prints too. That the $4bn size removed any fears of an overhang has also been a big help, bankers said.

With independent power producer Lestari Banten Energi set to end the year’s Indonesian supply as early as this week, the market looks ripe for a strong end to 2018 for the country's bond issuers.

That is more than welcome. Asia’s bond market is increasingly dominated by Chinese supply, and the need from investors to diversify has never been greater. It would not be unrealistic for the many Indonesian issuers looking to get their funding done next year before the presidential election in April to expect good demand for paper.

There is still uncertainty, with the looming election, slowing growth and a widening current account deficit weighing on sentiment. But this year has made clear that there is never a perfect time to tap the market. There are only good times and bad times.

For Indonesian issuers, now is certainly a good time. 

By Addison Gong
14 Nov 2018