Indonesia: Landmark global debt deals underline investor confidence

While the deal attracted global attention, the one that followed it was in its own way no less significant. In April the sovereign raised a further $650 million through a five-year global sukuk led by Barclays, HSBC and Standard Chartered. This was Indonesia’s first ever global sukuk, and the first anywhere in the world for almost a year.

This deal represented the culmination of years of effort. Indonesia had lagged many other Muslim nations, most obviously Malaysia, for years in terms of the development of its Islamic finance market, and in doing so was missing a useful funding source. But before this sukuk could be launched, a new law was required to be passed through parliament covering many of the vital matters relevant to sukuks such as tax treatment and underlying assets. That in itself took more than two years before entering law in May 2008. After that came a domestic sukuk late last year, and now the global.

Several things stand out about the deal. For one thing, according to both Waluyanto and bankers close to the deal, some 30% of the bonds went into the Middle East. “The sukuk is very meaningful to us,” says Waluyanto. “It is the first international sukuk we have issued, and is the first time we’ve been able to reach out to Middle East investors.” Waluyanto says great effort was made in building a structure that would be acceptable to Shariah investors in both Asia and the Middle East. “By issuing this we’ve been able to diversify our instruments and widen our investor base outside the traditional bases of Asia, Europe and the US,” he says.

Another was the pricing. The yield on these notes was fixed at 8.8%, much lower than the earlier conventional deal of the same tenor. Granted, there were clear points of difference: most obviously scale, market conditions, and the fact that the conventional global insulated the sukuk from new issue premium. But nevertheless, the lower cost is striking.  On top of that, the deal attracted more than US$4 billion in orders, finally reaching seven times oversubscription.

Although other bankers in the market raise their eyebrows at the 30% Middle East figure – some feel this is actually the figure for Middle East and Islamic investors, which would include some Malaysian funds – most are glad to see it out there. “It traded up like a banshee, but it is good to get it done and out of the way,” says one banker.

This should prove an influential deal. Waluyanto (speaking in the Ministry of Finance building in Jakarta that is the underlying asset for the sukuk) says already a private placement is being planned under another Islamic structure to raise further funds. And there’s the impact on other issuers. “The global sukuk opens the way for the next step, which is extending the regulatory framework to allow issuers other than the sovereign to issue into the foreign currency sukuk market,” says Anthony Shum, director, investment banking at Barclays Capital. “Then state owned enterprises and Indonesian corporates could also look at issuing global sukuk.” Revisions to Indonesian capital markets law can be tortuously slow, but it is hoped the success of the sovereign global will prompt things to move along a little quicker.

In combination, the two deals have almost realised that $4 billion ambition, and when local currency raisings are added Indonesia is in a comfortable situation. “They are in a very good position at the moment having pretty much done the majority of what they wanted to do,” says a banker who works with the government. In fact, more than one banker comments that Indonesia’s borrowing programme resembles that of the Philippines in recent years: get in early, front load as much of the year’s funding as possible, and then take your pick of opportunities as they arise later in the year. It was probably also desirable to get funding locked in ahead of April’s legislative elections and July’s presidential one.

Next is like to be a Samurai issue. “That’s very likely,” says Waluyanto. “We are in the process of preparing all the documentation.” It should be a relatively easy deal to get away since Indonesia has a $1.5 billion loan agreement programme with the Japan Bank for International Cooperation (JBIC); it is expected to be structured as a private placement, and may well not be as big as that $1.5 billion ceiling since so much has already been raised elsewhere. Waluyanto says that even before this Samurai the ministry has “already achieved about 70%” of the funding it wants for the year. “But we don’t want to scare our investors by supplying too much issuance.”