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Indo credits defy HY secondary market slump

08 Feb 2013

As Chinese high yield bonds sell off, Indonesian supply remains supported and the pipeline will continue to be met with strong international demand, particularly from the US.

The dollar bond pipeline from Indonesian corporations will be met with strong demand despite a recent drop in the Asian high yield market, as international investors seek diversification from Chinese names and US investors continue to support Indonesian paper.

In January, three Indonesian companies issued offshore bonds amid the strongest start to the year on record for Asian high yield issuance, according to Dealogic data. On January 8, property developer Lippo Karawaci, tapped its 6.125% November 2020 bond issue for an additional US$130 million, at a yield of 5.243%.

On January 16, coal maker Indika Energy launched a US$500 million, 6.375%, 10-year bond with a rating of ‘B+’. Gajah Tunggal followed suit on January 25 with a five-year deal of the same size, yielding 7.75%. The bond carries an effective rating of ‘B’.

The value of these deals totals US$1.13 billion. This is small compared to the US$7.07 billion issued by Chinese high yield companies over the same time frame – but sizable compared to the same time frame last year, during which no Indonesian corporates tapped the dollar market.

However, high yield issuance in Asia has slowed towards the Chinese New Year holiday and bankers are beginning to flag up a rotation of private banking money away from credit into equities, due to improving sentiment and an oversupply of high yield credit.

Performance split

Almost 79% of the dollar bonds sold in January by corporates in Asia ex-Japan lost money by the end of the month, according to Bloomberg data. This is evident in the poor secondary market performance of Chinese high yield issuers, many of which are currently trading down in the low 90s.

Agile Properties, Cheung Kong Holdings, Fosun, KWG Property Holding and Powerlong are among those companies whose bonds have struggled in the secondary markets. This sell-off is likely to affect primary market supply from China.

However, despite the secondary market slump in China high yield, Indonesian names have held up and the three bonds issued this year are all trading above 101 at the time of going to press. Further supply from the country is likely to be supported and the pipeline is looking strong, say bankers.

“The whole point is this - Indonesia is not China. And everyone would like to diversify away from China given the massive China supply year to date and so demand for Indonesian paper will continue to outweigh supply,” said Simon Page, head of Southeast Asia DCM at J.P. Morgan.

In addition to this, while much of the support for Chinese high yield names is domestic, Indonesian companies will continue to benefit from the US bid.

“All the deals this year except for Lippo are Reg-S and 144a. So what is pretty clear from Indonesian names is that there is a global bid. It is viewed from the US as one of the better regions in Asia and investors have a better track record there than other places in Southeast Asia or North Asia,” said a Hong Kong-based syndicate banker.

If you look at Chinese real estate deals, many of them were just Reg-S, especially those rated ‘BB’ and below. Many haven’t ventured into the 144a market. So the demand dynamics are very different.”

Supply side

A majority of the US dollar bond deals from Indonesia are from repeat issuers, which helps with name recognition from international investors. However, bankers say that there are several new industrial names looking to tap the market over the next few months, as well as some familiar issuers.

These include Bank Rakyat Indonesia, which plans to raise US$500 million to US$1 billion in a global bond this year. Lead underwriters on the deal will be Citi and Standard Chartered.

Listed tower operator Tower Bersama also announced on February 5 that it will issue US$500 million during the next few months, in part to refinance its existing debts. The company has said the five-year bond will have a coupon no higher than 8%.

“We’ve seen a bit of supply but there’s more to come. I don’t think we’ve even seen half the supply that will come in the first half,” said the syndicate banker.

However, pricing dictates that the onshore market offers more attractive pricing than the US dollar market, for a majority of Indonesian issuers. This will naturally limit the amount of US dollar Indonesian supply this year.

“On balance IDR generally remains cheaper versus USD swapped to IDR. So that is the preference for companies that have good access to IDR and that don’t need to do a big size. Players with dollar links such as the mining companies or those that need to raise larger amounts and longer tenors will go to the dollar market,” said Page.

Developments in the resource sector could also impact supply levels as much of Indonesian supply is resource orientated, said the syndicate banker.

08 Feb 2013