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By Kit Yin Boey
SINGAPORE, Nov 18 (IFR) - International investors made a beeline to two Indonesian sovereign-related Global deals last week, lured by a rare opportunity to make a play on the country's widely expected upgrade into investment grade territory from the current Ba1/BB+/BB+.
The Republic of Indonesia's USD1bn seven-year sukuk and the quasi-sovereign Perusahaan Listrik Negara's USD1bn 10-year Global gathered a combined book of USD13bn - an impressive figure, all the more so given the crumbling credit market sentiment triggered by the European sovereign funding crisis.
Interest in the Indonesian growth story has been strong this year as the three main rating agencies upgraded their ratings on the sovereign to just a single notch below investment grade. Expectations are that a promotion to that much sought after rank will happen over the next 12 to 18 months, with Fitch likely to look at its rating in the first quarter of the year.
Indonesia has been a magnet for foreign funds, investors attracted by its healthy economy which is expected to grow by 6% in 2011. Foreign exchange reserves will hit USD116bn by the end of the year and credit growth in 2012 is expected to rise as the economy continues to expand.
These are attractive numbers for foreign funds, whose ownership of rupiah-denominated government bonds peaked at Rp249trn in July this year before a huge sell-off in global markets saw that drop to Rp218trn in September when the European liquidity crisis exploded.
Since then, foreign holdings have bounced back to Rp221.5trn as of November 15, well ahead of the Rp195.7trn held at the end of last year, and accounting for nearly a third of the total volume of outstanding government paper.
Although any sudden outflow of foreign capital would necessarily hurt the economy, the Indonesian government has put in a series of measures to limit the impact, with Bank Indonesia ready to intervene if required. The government is estimated to have about Rp70trn (USD7.75bn) to support the bond market.
"Given the government's conservative nature, we believe it is likely to maintain a cash buffer of at least Rp50trn going into 2012, apart from having the cash needed for paying maturing debt and financing Q1 budget position," said Barclays' credit analysts Prakriti Sofat and Kumar Rachapudi.
Interest was therefore intense when the sovereign launched its deal on Monday. The deal, and the PLN issue, have been flagged for months, although talk intensified after the RoI held roadshows in the Middle East in September and PLN sought consent on debt covenants in early November. With just a few weeks of the year remaining, the pressure was on to use one of only a handful of windows to get a deal away amid the volatile market conditions dictated by the European debt problems.
So when Asian markets rallied on Monday morning, the government gave the nod for joint leads Citigroup, HSBC and StanChart to quickly launch its 144a/Reg S sukuk, bringing forward the schedule from later in the month. The idea was to quickly wrap up the deal within the day before further negative headlines emerged from Europe to dent the relief rally.
A wily strategy was used. The leads canvassed investors in the Middle East on Sunday and Islamic funds in Malaysia and Indonesia on Monday morning, gathering a preliminary anchor book of some US$750m at guidance of around 4.25%. With that solid base in hand, they launched the deal to the market. The idea was to build momentum and show conventional investors that the issue had sufficient orders for a benchmark size at indicated pricing that yielded only 40bp in new issue concession over the outstanding 2019s, which were trading at about 3.85%.
Conventional buyers, who have been starved of supply, piled in, although the global rally was sputtering by the time European markets opened. The final book nevertheless totaled US$6.5bn up at the final yield of 4.00%, giving only about 20bp over the 2019s.
At a healthy 4% yield, investors were holding paper which could be upgraded in a year's time - an attractive prospect indeed. Indonesia's Global sukuk, Ba1/BB+/BB+, was followed a couple of days later by Bahrain's sovereign sukuk (BBB/BBB) with a similar tenor but at a higher coupon of 6.273%.
4% is the lowest coupon and yield ever achieved by Indonesia in all its US dollar sovereign issues, an impressive feat given that it had paid a coupon of 4.875% and a yield of 5.1% on the USD2.5bn conventional 10-year Global in April when market conditions were better. It more than halved the 8.8% yield from its debut USD650m five-year Global sukuk in April 2009.
The excess orders from the issue and the fast-changing market conditions prompted quasi-sovereign PLN (Ba1/BB/BB+) to launch its own 144a/Reg S 10-year bullet deal the day after. The timing generated plenty of criticism, as the generous looking guidance at 5.875% and fresh supply caused the entire Indonesia curve to push out, including the new RoI sukuk which traded down from reoffer.
"It took everyone by surprise to see a quasi-sovereign come out a day after," said one rival banker. "It was not only the timing, but that it came amid a weakening market, and, with such a cheap pricing, investors were putting on switches and that took out the Indonesian sector."
The guidance yielded about 180bp over the sovereign curve, well above the 140bp spread of outstanding PLN 2020s over sovereign bonds and the 90bp average before rumours of the supply emerged. The huge concession pushed the RoI sukuk down to 99.85 from par, while Pertamina 2021s slipped to 101.75-102.75 from 103. Philippines paper did not escape unscathed as longer-dated bonds dropped by a quarter point.
Joint leads Barclays and Citigroup argued that windows for issuance open and close so rapidly that issuers have to be quick off their feet to capture what they can. As it turned out, market conditions worsened on Wednesday, and it would have been impossible for PLN to launch.
PLN also wanted to exploit the feel-good sentiment towards Indonesia and benefit from any overhang in demand from the RoI deal. Given that PLN is a quasi-sovereign, it was doubtful that the government was kept in the dark about the launch.
The robust market response seemed to validate both the leads and the borrower. A total book of USD5.5bn came together at a yield of 5.625%, 25bp inside guidance. Bonds traded on the break at par, up nearly a point from the issue price of 99.054, slipped to 99.3 on Wednesday afternoon but caught a private bank bid on Thursday to bounce to 99.40.
At the final 5.625%, bonds were equivalent to 140bp over sovereign paper, on a par with outstanding bonds, and only a minimal 2-3bp in new issue concession on a curve-adjusted basis over the outstanding PLN 2020s. "It is the right balance, and that is reflected in how the bonds had held up in secondary trade," said a banker close to the deal. (Reporting By Kit Yin Boey; editing by Julian Baker)