Euroweek Indonesia report: corporate borrowers

Euroweek, September 2013

Standfirst: It has been a year of divergent fortunes for Indonesian corporate debt. The first few months of the year were characterised by endless liquidity, an environment in which low rated borrowers could access remarkably cheap funding. Then everything changed. When, and how, will the markets return? By Chris Wright

Indonesian corporate issuers enjoyed a lively start to 2013 – then vanished following Ben Bernanke’s comments on tapering in May. The question now is what happens next: continuing absence from the markets now that the cost of funding is so much higher than earlier in the year, or an acceptance that pricing today is the new normal and that funds must be raised?

The start of the year was characterised by a wide range of issuers, sectors and ratings. First out of the gate was the property developer Lippo Karawaci, which raised $130 million through its Theta Capital SPV in a tap of an outstanding bond in early January.

It was a small deal, but one that would set a pattern for the months ahead: it received $845 million of orders from 60 accounts, making it six and a half times oversubscribed. It achieved this, through bookrunners Bank of America Merrill Lynch, Citi, Credit Suisse and Deutsche Bank (four bookrunners on a $130 million deal is also something of a sign of the times in Asia), despite the bonds being rated just B1 by Moody’s and BB- by Standard & Poor’s, and paid a yield of just 5.243% on a bond which at the time had almost eight years to run.

Next came Indo Energy Finance, which raised $500 million through Standard Chartered, UBS and Citi, from just a B+ rating, in January; and later that month PT Gajah Tunggal, a tyre manufacturer, rated just single B. The low rating did not stop it from raising $500 million in five year non-call three paper, sufficient to finance a tender offer and consent solicitation for an outstanding $413 million 2014 bond. Bookrunners Credit Suisse, Deutsche Bank and HSBC priced the deal to yield 7.95% – which is, roughly, where Indonesian local currency five-year sovereign paper is pricing today. It is fair to say Gajah Tunggal timed its issue well. Moreover, it sold widely and attracted $3.75 billion of orders from over 200 accounts: Asian investors took 41%, US 37% and Europe 22%. While fund managers took the lion’s share of it, at 80%, there was even room for insurers to take 6% of it. Insurers buying a single B rated Indonesian tyre manufacturer paying less than 8%? Apparently so.

At this stage it was fair to say that the Indonesian high yield market was humming, as it tends to do from time to time, and the positive tone had further to run. Three more corporate issuers followed in March: Alam Synergy, Star Energy Geothermal and TBG Global. Alam Synergy, a funding vehicle for B+ rated property company Alam Sutera, raised $235 million from a seven year non-call four bond, a deal it increased in size from a planned $200 million after pricing well inside initial guidance. Leads Morgan Stanley and UBS started out with price guidance of 7.625% before pushing it down to just 7.25% at launch. Star Energy, which included a Rule 144a registration alongside Regulation S, raised $350 million, also in a seven year non-call four format, and found itself with an order book of $4 billion. Its own price guidance started out at 6.625%, then fell to 6.25%, and eventually priced at 6.125%, through Barclays and DBS. More than 200 investors placed orders. Star Energy is also rated B+.

Considering that Bank Rakyat Indonesia raised $500 million on a five year bond on the same day as these two deals, it was quite a day for Indonesian credit. But there was more to come that week, when Tower Bersama, a telecom player, raised $300 million in five year funds. TBG Global, the issuing entity, is rated BB.

By now, “excess liquidity was leading to incredible market conditions: over 20 years I have never seen a first half like this,” recalls Aaron Russell-Davidson at Standard Chartered. “Money was so cheap, with so much QE in the system, that investors were becoming irrational. Issuers were printing at levels far beyond the fundamentals of the companies. It was almost a perfect storm.”

This was the case across all Asian high yield. “Chinese high yield made up the bulk of issuance earlier in the year, but Indonesia played a significant role as well,” says Russell-Davidson. “Selling Indonesian high yield debt was a fairly straightforward exercise in the first half.”

And on it went. In April came Comfeed, a poultry feed producer, which raised $200 million in a five year non-call three transaction at a 6.125% coupon, in a deal through Credit Suisse that was 10 times oversubscribed, attracting $2.5 billion from 170 accounts. And this amid concerns about bird flu.

Then it was the turn of the biggest name: Pertamina, which is often considered a quasi-sovereign issuer, and is one of the few corporate names not to be high yield since its rating rose to investment grade with the sovereign last year. In May, it received $8.7 billion in orders from 380 accounts for a $1.625 billion 10-year deal, and $5.7 billion in demand from 280 accounts for a 30-year bond of the same size. In both tranches, it slashed its borrowing costs. It paid a 4.35% coupon for its 10 year funds in the deal, through Barclays, Citi and Royal Bank of Scotland, and achieved global diversification in doing so.

And then, on May 22, Ben Bernanke spoke.

Bernanke’s comments on tapering had ramifications all over the world, but few sectors were hit harder than Indonesian debt. One more deal did brave the market: B+ rated Multipolar, issuing through its holding company Pacific Emerald, which raised $200 million in July. The contrast with deals earlier in the year was stark: it paid 9.75% for its money, more than 300 basis points higher than the secondary levels of Multipolar’s parent, the Lippo Group which was providing support for the bonds. Citi and Deutsche were joint global coordinators. One person close to the deal said at the time: “Everything has a price.”

It was a bold attempt to re-open the market, but no others followed, and by early September it was trading in the low to mid 90s, while the Pertamina 30-year tranche was trading at a cash price of just 74. “Those investors that bought that in the primary market are obviously deep underwater,” said one person close to that deal.

Consequently, for a period of months, there was something of an unbridgeable gap. Investors, burned by their enthusiasm earlier in the year, would want to be very well recompensed for venturing anywhere near corporate paper again; and issuers, unless staring at pending redemptions, would be unwilling to pay what was required. “Would Pertamina now go and borrow 30 year money at 8%, having paid 5.625% in May? Not unless they absolutely had to,” says one banker.

So where next? Eventually, some sort of equilibrium must be struck between the silly enthusiasm of the start of the year and the equally gung-ho pessimism since.

“I would expect to see more normalised market conditions from now on,” says Russell-Davidson. “Obviously the pendulum had swung too far, and in the last few months there was an onset of panic with tapering as the catalyst. As perceptions adjust, we are likely to see a more calm, methodical market than we’ve seen in either of the two extremes this year.”

“The situation has changed to a point where investors need to get paid, and if there is a sensible yield on a credit, good deals will still get done.” He says there will be “several Indonesian corporate names over the course of the next month.” He adds, though, that there is little pressure to rush. “There is no huge cause for concern in bond markets around refinancings from Indonesia. Most of those that needed to do so did so early in the year, with great prices, and termed out debt. We are not facing a wall of refinancing with imminent execution deadlines.

“An awful lot of people saw exactly what was coming and took advantage of it.”

Julyasari, head of debt capital markets for Indonesia at HSBC in Jakarta, believes we may be starting to see the first signs of a return. “In the past two weeks the high yield market has started to re-open, not from an Indonesian corporate perspective, but elsewhere,” she says, noting the return of Chinese property developers. “With the opening of high yield bonds from other countries, we are expecting a lot more to happen here. The high yield market for Indonesian corporates is still not the most familiar, but it has started to improve in the last few years and more Indonesian corporates are looking at it. We are still quite optimistic that it is a market they will look to in the future.”

Julyasari speaks to Euroweek the day after the September 18 comments by the Federal Open Market Committee (FOMC) suggesting no tapering was imminent. This could prove to be a pivotal moment, she thinks, as companies have been waiting to get a clearer sense of the progress of tapering before deciding on investment plans and, in turn, the need for funding.

“Indonesia has always been a good country for investment and for the manufacturing base,” she says. “If you look at corporates during the past year, they have had quite an aggressive expansion plan in Indonesia. After the tapering news, some corporates have held off their investment plans, but with the news from FOMC I think they will review again whether they should execute their plans.”

In September, hopes were revived of a return to Indonesian high yield when Apexindo Pratama Duta set off on a global roadshow to sell US denominated bonds. The company, which is a service provider to the oil and gas industries, has mandated JP Morgan and Standard Chartered as joint global coordinators, with ANZ as a bookrunner. In mid-September, the talk was of a $300-400 million deal in five or seven year maturities, with a roadshow due to visit Hong Kong, Singapore, London and several US centres.

If it goes ahead, the deal will be significant, as the notes are expected to be rated just Ba3/B+. It may help that it has an offshore entity, Apexindo Netherlands, to issue the bonds, which will be guaranteed by the onshore company.

Additionally, at the time of writing Modern Land, an Indonesian property development company, was believed to be trying to enter the market. “If it does,” says Julyasari, “we expect more to come.” Modern Land is rated just single B.

Others are more cautious. Herman van den Wall Bake, head of debt capital markets for Asia at Deutsche Bank, sees several impediments, starting with the level of investment of companies themselves. “Clearly commodities have suffered, and companies that were investing heavily over the last couple of years are now finding that their cashflows are not what they were projected to be when they made those investments,” he says. “There are a few companies that have been regular borrowers in the capital markets that are now in the process of divesting assets, or restructuring debt.”

“The potential for Indonesia remains extremely attractive, but I think we are going to go through a period of consolidation and readjustment that will separate the wheat from the chaff. Three to six months from now we are going to be looking at a far more favourable backdrop and far better valuations for investors.”

That said, he does share the view that valuations have overshot from a period of the year when they were too tight.  “Now, valuations are too generous, if you look at the underlying health of many of these companies, and where their bonds are trading now relative to where they were issued,” he says. “The reality is the underlying fundamentals have not changed enough to justify the drops in valuation. Those that are courageous and patient will be rewarded; those that are forced to sell because of redemptions, that’s their hard luck, because they will be selling at the lows.”

But it’s not all about valuation: investors are also naturally caught up in the macro situation, and other factors beyond individual creditworthiness.  “Investors will want to see some stability on the FX front before high yield activity returns,” says van den Wall Bake. “And the cost has gone up so dramatically for many companies it won’t make sense anymore. Those that could have paid 6 or 7% six months ago would now be paying double digits. That can mean the difference between making an investment profitable or unfeasible.”

And what of local currency?  Rupiah bonds, too, have widened considerably since May. “Pricing in local currency has changed quite a bit,” says Julyasari. “Assuming a rating of AA-, they would have paid 7 to 8% earlier in the year for three years tenor, but at the moment issuers may be looking at 9 to 10%.”

Nevertheless, issuance has been surprisingly robust. “The local currency market has developed quite actively in the last few years,” she says. “Last year alone, we witnessed a record high, with total volumes of Rp69 trillion.” In the first five months of this year issuance was Rp24.46 trillion, she says, but most surprisingly, post the Bernanke comments, in June and July there was a further Rp19.125 trillion from 21 issuers. Year to date, the total by the end of July was Rp43.59 trillion – representing 2.23% year-on-year growth. The IDR bond market today, she says, represents 57% of the size of the loan market, which suggests a healthy direction.

“July and August were very slow months with basically no issues, as issuers preferred to observe the market reaction,” she says. “But issuers acknowledge that the rupiah bond market remains an important avenue.” She says that four issuers are looking to raise funds domestically this month, aiming for Rp 4.6 trillion between them: they are Jasa Marga, Surya Artha Nusantara Finance, Duta Anggada Realty, and Adira Dinamika Multifinance.

“Local investors are conventional investors, who look at the credit rating as well as the coupon,” Julyasari says. “A rating between single A and BBB is still acceptable to the investor, if the coupon is attractive.”

The rupiah will remain a vital part of the funding options for Indonesians, as will dollar funds when markets return. And they will: it’s just a question of when, and how exacting the price investors require. As Russell-Davidson says: “Rumours of the demise of the Asian bond market are overdone.”