Indonesia: Landmark global debt deals underline investor confidence

Asiamoney, May 2009

The Indonesian sovereign has been arguably the most interesting and important debt issuer in the world in the early months of 2009. In the space of a few weeks it reopened the international debt markets for emerging market countries with a $3 billion deal; then launched Indonesia on to the global Islamic financial markets with a $650 million landmark sukuk.

It has had to pay for its success, but its ability to raise such funds has not only eased the country’s capital position but made an important statement about investor confidence in it. The next question is whether this success can trickle down into the local debt markets when many companies have an urgent need of it.

When a Ministry of Finance team set off around the world in a non-deal roadshow in February, it did so knowing Indonesia had a lot on its plate. With world markets – both stock and credit – remaining in a mess, ministry staffers knew their country was facing a hefty debt load: total external debt of $149.1 billion, including short-term private external debt of $22.6 billion, with the sovereign itself needing to raise $4 billion swiftly to deal with its high budget deficit and provide stimulus to a flagging economy. Finance minister Sri Mulyani Indrawati led the team, and she presented well. “It was good to have the minister on the road,” says Fergus Edwards of UBS, who was on the roadshow. “She talks about the numbers. She doesn’t even appear to be spinning for a political audience.”

Across Europe, the US and Asia, questions came up about the size of the budget deficit, the country’s resilience in the face of commodity price shocks, tax revenues and sources of funding. “What they liked beyond any specific answer was the degree of detail around all those answers,” Edwards recalls. Additionally, Indonesia’s economy was starting to look relatively healthy by global and regional comparisons. “It’s interesting,” says a banker. “Indonesia during bullish periods tends not to grow as fast as the others, but when there is a financial crisis or a situation where growth is slower, it’s less affected by the external environment due to the fact that a lot of their economy is still domestically focused.” So by the time the roadshow was concluded, there was confidence that a deal could go ahead.

Getting one away was not straightforward. Historically Indonesia has launched its deals one at a time, which causes problems with market timing since every deal requires its own standalone documentation. This time, Indonesia had mandated UBS and Barclays Capital to set up a global medium-term note programme, which will allow it to issue at any time (the same banks were then mandated as bookrunners on the bond), but still ministry officials had to go back to parliament to get approval for any bond.

That proved to be unfortunate. On Friday February 13, with strong demand and markets about as good as could be expected given the broader environment, the deal went before Parliament; a swift approval would have allowed it to issue. “But then on Monday we got the very disappointing news that the parliamentary session would be postponed until a week later,” says Rahmat Waluyanto, director general of debt management at the Ministry of Finance. “It affected market sentiment and also the yield of the bond.” Markets became skittish in the meantime, thanks partly to renewed worries about the viability of Citigroup. “It might not have been ideal but given the legal constraints and the need to run a transparent process there was no alternative,” says Edwards.

The fallout of all of this was that Asia’s biggest deal since Hutchison Whampoa in 2003 got away in hellish markets, but at considerable cost. A US$1 billion five-year tranche priced at 10.375%, or Treasuries plus 850 basis points, and a US$2 billion deal priced at 11.625%, or 881 basis points over Treasuries. Market watchers reckon the delay probably cost the sovereign as much as 90 basis points on the 10-year deal. But in truth, particularly on the ground, there is little sniping about the deal. “It borrowed at cost, but at least it has borrowed,” says one senior foreign banker in Jakarta. It also demonstrated the depth of conviction that foreign investors have in Indonesia’s story: some 50% of the 10-year allocation went to the USA, and the bulk of it from long-only fund manager money. For his part, Waluyanto thinks that despite the widened spread, “we still managed to execute the transaction at a relatively tight new issue premium.”