Indonesia closes $1 billion bond amid muted demand

The Republic of Indonesia priced a $1 billion bond on Wednesday night, the first dollar bond out of Asia ex-Japan in more than a month.

While the first five months of 2013 saw unprecedented supply from the region, the sharp spike in US Treasury yields in May and June sparked a dramatic sell-off in Asian credit. The last dollar bond was Huaneng’s $400 million bond, which crossed the line early June with help from Chinese banks.

Times have clearly changed — and this was reflected in the ROI’s deal, which attracted a muted order book of $1.9 billion from 120 investors. This contrasted sharply with Asian sovereign bonds that priced earlier this year, which were heavily over-subscribed.

The initial guidance was released at the 5.45% area on Wednesday, and did not budge from there — with the bonds pricing to yield 5.45%. By being the first to go, Indonesia got ahead of a long queue of borrowers that are waiting at the wings. But it had to pay up, offering investors a new issue premium of about 50bp.

“It was not an easy deal but we needed a high quality borrower to re-open the market,” said one source familiar with the deal.

Indonesia last tapped the bond markets in April when it priced a $3 billion dual-tranche jumbo bond. That deal attracted an order book of $12.5 billion and, notably, the 30-year bond priced to yield 4.75%, which was lower than its latest 10.25-year bond.

At that time, the jumbo bond was said to have concluded Indonesia’s offshore conventional funding needs for the year. However, according to a source familiar with the matter, Indonesia has since revised its funding needs for the rest of the year, after its budget deficit turned out to be wider than expected, despite removing fuel subsidies.

Its revised offshore funding needs are about $3 billion, which includes its latest $1 billion bond. This means that there is about $2 billion left to be raised offshore and, according to the source, it is expected to be raised through a sukuk.

Despite the muted order book, the bonds traded up in secondary markets and were quoted at 100.75 in secondary on Thursday late morning — a sign that they were in the right hands. US investors were allocated 49%, European 26% and Asian investors 25%. Funds were allocated 71%, insurance and pension funds 19%, banks 6% and private banks 4%.

Indonesia retained J.P. Morgan and Standard Chartered, which were both bookrunners on its April issue for its latest bond, but replaced Deutsche Bank with Barclays.

The coupon was fixed at 5.375% and the notes reoffered at 99.391.