By Sid Verma
Before the primary markets shut down towards the end of last year, the Republic of Indonesia had already firmly cemented its reputation as a key emerging market issuer.
The country’s successful foray into international markets – with two ambitious and popular benchmark global bonds in 2008 – didn’t just prove wisely timed. The deals also helped develop credit momentum for Indonesian risk while strategically boosting liquidity in the long-end of its yield curve and cementing good relations with an increasingly faithful buyer base.
The bonds have helped the government diversify its borrowing sources by boosting access to the biggest and most liquid market in global finance: cross-border US dollar debt markets, undiminished as a source of financing for developing economies.
The country’s relative resilience to the global slump has partly compensated for plummeting enthusiasm for emerging market risk, but the pricing levels and mechanics of these transactions also deserve credit.
The first deal in January made Indonesia become the first Asian sovereign of the year. The $2 billion transaction was priced at par, in line with official guidance at 6.875% for a $1 billion 10-year tranche and 7.75% for $1 billion of 30-year notes.
At the time, the country hadn’t dived into external markets since February 2007, at the time with a $1.5 billion bond, and, previously, a $2 billion transaction in March 2006.
“People were questioning whether the issue could be done at the beginning of 2008 given the issuance environment towards the end of 2007 and market participants in general did not expect investors to respond so positively at the time,” says Kenneth Lee, director of Asia debt syndication at Barclays Capital, co-lead manager on the deal alongside HSBC and Lehman Brothers.
But the transaction was priced within 9 hours of launching official price guidance to final pricing with an order book exceeded $3 billion. The 2018 tranche came in at US Treasuries plus 306bp while the 2038s offered a spread of 329bp. Bankers on the deal say this represents around a 30bp premium, reflecting the large size of the deal and to compensate for investor wariness towards long-dated paper.
To educate investors about the country’s economic prospects prior to the deal, Indonesia embarked on an extensive roadshow with two different teams covering the US east and west coasts, as well as Asia and Europe. Finance minister Sri Mulyani Indrawati embarked on face-to-face meetings with fund managers in a tour that helped cement Indonesia’s growing status as a preeminent emerging market borrower.
Her efforts paid off, and the January deal proved immensely popular, with its $3.5 billion of orders. This looks all the more impressive given the volatility on the iTraxx Crossover Index for emerging market credits and write-downs by Merrill Lynch on its mortgage-backed securities portfolio that week.
On the 10-year tranche, 47% of the buyers were based in the US, 29% Europe and the remaining 24% in Asia. By investor type, real money accounts snapped up 68% of the 10-year deal, banks 10%, central banks 5%, pension funds 13% and others represented 4%. For the 30-year notes, 52% went to the US, 38% Europe and 10% to Asia while 80% were fund mangers, 9% banks, 4% insurers and pension funds and others represented 7%.
The deal served to blaze a trail for Indonesian risk while a 30-year issue should, in theory, serve as a useful long-dated benchmark for Indonesian corporates– if and when corporate primary markets re-open.
“The fact that the deal traded up in the aftermarket set the stage for the tap which happened later in the year,” says Lee.
In June, Indonesia emerged onto the international scene once again to re-open its existing 2014, 2018 and 2038 benchmarks via lead managers Credit Suisse, Deutsche Bank and Lehman Brothers.
Rather than seeking to develop its credit profile, the deal’s primary aim was to grab cash – and fast. Costly fuel subsidies had taken a chunk out of the national budget in the 2008 fiscal year. Meanwhile, an oversupply of government paper and a monetary tightening cycle derailed new sovereign issuance in the local rupiah market early in the year.
“If Indonesia tapped too much from domestic sources, it would take out the much needed liquidity for the private sector so it has increasingly established relationships with international investors in recent years to ensure good access to external markets,” says Lee.
As a result, the sovereign tapped its outstanding 6.75% 2014s for $300 million, $900 million on its 6.875% 2018s and $1 billion on its 7.75% 2038s - to issue $2.2 billion in total.
Despite the risks of simultaneously opening up three existing tranches in choppy markets, the deal reeled in $6 billion of demand – biased towards US and real money accounts which were attracted to the discount to secondary prices. The borrower was also able to re-open the 2018 and 2038 notes for more than anticipated and the deal stands as the largest non-investment grade sovereign issue from an emerging market in 2008.
Reports of the death of emerging market sovereign debt as an asset class are greatly exaggerated.