IFR Asia: Southeast Asia debt capital markets guide: Indonesia

IFR Asia Southeast Asia DCM report – Indonesia

December 2009

Regional bankers tend to express more disappointment about the Indonesian rupiah bond market than any other in southeast Asia in 2009. It didn’t do badly, exactly, but it probably did less than other markets to emphasize its role as a liquid alternative funding source to dollar debt.

ThomsonReuters data says Rp16.8 trillion was raised in 2009 by November 19, already ahead of the Rp16.01 trillion for all of 2008 but well short of Rp24.85 trillion in 2009. That said, many in the industry, interviewed in November, believed there was plenty more to come in 2009, with some still expecting a Rp30 trillion total for the year that would put it in a wholly different light. In particular, an expected Rp3 trillion or larger sub debt raising from Bank Mandiri, due to be settled in December, was being closely watched.

Dhanny Cahyadi, president director of PT ING Securities Indonesia, says the rupiah bond market was “volatile but performed relatively well” during the global financial crisis. It started weakly, before Astra Sedaya Finance became the first private sector corporate bond deal in rupiah in April, raising Rp900 billion in an upsized, multi-tranche issue led by HSBC, Indopremier Securities, ING and Mandiri Sekuritas. With Astra having launched successfully, other blue chips flowed, among them Indofood, which raised Rp1.61 trillion, the largest non-financial corporate bond in 2009; Medco Energy; Bank Ekspor Indonesia, whose four-tranche deal raised Rp2.5 trillion; Panin Bank; Bank BTPN; and state-owned pawnship chain owner Perum Pedagaian. There were no real surprises in the list of issuers. “The type of issues remains relatively the same as previous years,” says Cahyadi. “The frequent issuers are typically from the financial institutions sector, including banks and consumer finance companies.”

Perhaps the most significant rupiah bond in Indonesia this year was much smaller than those – a Rp100 billion deal backed by Bank Tabungan Negara, the first mortgage-backed securitization in Indonesia. “Before this, all bonds were basically straight bonds,” says Iwan Wisaksanai in corporate finance at Kresna Securities. “This was the first securitization.” Regulation permitting securitization actually dates from 1997, but it has taken this long for sufficient interest to develop on both the originator and investor side. “It took more than 10 years to launch one transaction,” Wisaksanai says. A second transaction followed in the fourth quarter, bringing the total issuance between the two to almost Rp500 billion; Standard Chartered was lead arranger on both.

But international bankers have been disappointed with what they’ve seen. One points out that the government bond market is 35-40% held offshore – the highest percentage in the region – and that bigger borrowers still tend to go offshore because liquidity is not abundant at home. “Indonesia is probably a little bit more a hostage to the G3 markets.”

Terence Chia at Citi adds: “Companies in Indonesia are pretty open to issuing in dollars and can get decent sizes done, but issuing in the local currency market is generally not as deep as some other markets.”

Locals seem to view the market differently to foreigners. “We are quite busy, especially in the first half of this year when interest rates were quite low,” says Wisaksanai. Speaking in mid-November he expected a number of non-financial institutions to issue bonds in the fourth quarter, and hoped full year issuance would be between Rp20 and 25 trillion, followed by a drop back to Rp10-15 trillion for 2010.

Similarly, asked if 2009 has been busy in local debt markets, Dini Wijayanti, vice president in the investment banking division of PT Indo Premier Securities, says: “Of course. It’s been very active.” She, too, considers the pipeline so strong, with about Rp12 trillion on its way, that a full year issuance of Rp30 trillion could still be achieved. She is watching closely Mandiri’s forthcoming deal, which she says could raise as much as Rp5 trillion in tenors of up to seven years. “Looking at the current pipeline the most important is Mandiri,” says Wijayanti. “It’s a good company, a massive issue, and the pricing is quite generous, so that one I think will be the benchmark for other issuers in Indonesian bonds.”

It is tough for lower rated names to access rupiah bonds, the more so since a new regulation came into place requiring pension funds to invest only in bonds rated single A or above. “There are not many companies that have a rating of A, so in terms of debt issuance, it has fluctuated a lot in the last 10 years,” says Wisaksanai. Wijayanti adds: “The pool of investors has become a bit smaller for bond issuers below single A.”

Higher rated companies tend to congregate in three to five year maturities, though some have gone as long as seven or 10. “We are bound to see more sub debt issuance and securitization deals so we would not be surprised to see a lengthening of the tenor,” says Cahyadi, although all local participants add that the corporate bond market lacks liquidity. “We hope that over the years the IDR bond market becomes more mature and developed as the other domestic bond markets,” Cahyadi says. “A lot needs to be done by the regulator to create a more conducive environment but we are moving in the right direction.”

Generally, though, the world seems quite optimistic about Indonesia, one of the standout emerging market economies through the financial crisis, and now blessed with political stability after president Susilo Bambang Yudhoyono was returned for another five year term. “After the general election we heard a lot more good things about Indonesia, from both Indonesians and foreigners,” says Thomas Meow at CIMB, which is heavily represented in Indonesia through its ownership of Bank Niaga. “We are very positive and believe investors will be putting more money to work in the bond markets there.”

BOX: Interview with Rahmat Waluyanto, director general of debt management at the Ministry of Finance.

Rahmat Waluyanto oversees the debt capital markets activities of Indonesia. He’s best known on the world stage for his involvement in landmarks like Indonesia’s dollar issue at the start of the year, and the landmark sukuk; however he also has responsibility for development of the rupiah debt capital markets.

From the point of view of government issuance, he says the impact of the global financial crisis was clearly present in increasing yields and a lower volume and frequency of secondary market trades, but was not drastic. “Last year we only issued bonds until October, and then we started again in January,” he says. “The rising yields in the domestic market meant that we couldn’t award the bids in our auctions, but only for two of three months. After that, and especially after our US$3 billion global bond issue, the markets calmed down, as investors perceived that the government had been able to secure its financing for that year.” Contingent financing from the ADB and other multilaterals also helped to calm the markets, and brought down yields on rupiah government bonds considerably.

“Everything has changed drastically,” he says now. “The yield of rupiah bonds [more recently] was 400 basis points lower than in October 2008.” This drop, in turn, helped Indonesia to secure the budget; it conducted its final auction of the year in November and will offer no more until 2010.

Waluyanto notes that something striking happened in October. The net buying of rupiah bonds by foreign investors that month was Rp8 trillion. “It is much, much bigger than the net buying of foreigners in the stock market.” He is encouraged to see foreign ownership of rupiah bonds is increasing, and notes: “There is no tendency that it is going to be lower.” He puts foreign ownership at about 18% of total tradable government bonds outstanding (a total market of about Rp580 trillion), compared to 16% as recently as December. He credits this rise to the strengthening rupiah, the spread between Indonesian government bonds and US treasuries, and growing confidence in Indonesia generally. He also notes that almost 80% of the bonds held by foreigners have a longer tenor, of five years and beyond.

And what of the corporate bond market? Waluyanto denies that issuance in this market has flagged, and makes a bold-sounding estimate echoed in other parts of the market that full-year issuance could hit Rp30 trillion despite the fact it was barely half that by mid-November. He notes, though, that companies have been able to raise funds in the booming equity market this year, which may have removed the appeal of the debt markets.

There is a sense that Indonesian issuers are much more likely to go for dollars than rupiah given the choice. Waluyanto says: “If everything goes well, with no market volatility, we prefer to have rupiah bonds. Basically, it is going to be more stable if we have a widened investor base in the domestic market. There are some advantages of issuing overseas because it can support the reserves, the balance of payments, and create a benchmark for international issuance for corporate. But our policy is still prioritising domestic bond issuance.”

He adds: “The global market cannot last forever in terms of its stability. At any time something can happen: the market dynamics can be destabilized by a bank collapse. We are better prepared by having an investor base in the domestic market.”

So how can the corporate bond market be boosted? “Well, I think we must give them space,” he says, by which he means not crowding corporate issuers out with government paper. “The government has been the largest single bond issuer in the domestic markets, so our main concern is to avoid carving out the domestic markets.” He says that by issuing globally in dollars, samurai, global sukuk, and other offshore measures, “that is one of the ways we gave some space for corporate bond issuance in the domestic market.” Also, he says the government has tried to lengthen the duration of its issues. “This is also to give space to the corporate sector who only issue in the medium term. Five years, three years – we try to do our best to avoid issuing bonds in that tenor.”

Waluyanto has been instrumental in the development of a sukuk market in Indonesia, going right back to the legislation that had to be passed in order to allow the government to issue in the first place. The global dollar sukuk caught the headlines, but it has also issued domestically in rupiah, using the ijara structure, using government assets as the underlying. “Going forward we need to diversify our sukuk instruments by trying to introduce a project-based sukuk next year, hopefully,” he says. “We will select one or two projects that can be financed through sukuk issuance as a pilot.” These deals are in preparation but Waluyanto says they will be in rupiah.  He also argues that there is no additional cost in sukuk issuance. “Any time we issue sukuk, we never give any extra premium.”