Indonesia hits bond market with $2 billion issue

Indonesia has been quick to follow the Philippines with the issue of its first sovereign bond in 2010. The $2 billion SEC-registered deal was jointly arranged by Barclays Capital, Citi and Credit Suisse and was described by one banker as Indonesia's best transaction to date from a pricing perspective.

This 10-year deal, which was issued off Indonesia's global medium term note programme, was not without its share of controversy, however, with rival bankers and the Indonesian press questioning the timing and pricing of the sale, based on initial market rumours that Indonesia would place a $3 billion to $4 billion deal in the New Year.

The talk generated in the media regarding the $4 billion mark, and the fact that the bonds would be sold at a premium, were speculative, however, as the initial guidance issued by Indonesia's ministry of finance was for a deal of between $1.5 billion and $2 billion only. There was also talk that a 30-year tranche with a 7.25% yield would be issued alongside the 10-year; but that didn't materialise.

The issue paid a coupon of 5.875% and was re-offered at 99.044 to yield 6% to a maturity date of March 13, 2020. That was the equivalent of 227.9bp over US Treasuries.

A source close to the deal said that the bonds were always going to be priced tightly and flat to the curve, and taking into account the slightly longer maturity of the new issue, they were.

The initial pricing was benchmarked against the existing 2019 bonds, which prior to the announcement of this deal were trading at 140.625 with a yield of 5.82%. When formal guidance was released for the 2020s, the 2019s had softened to 139.75 to yield 5.92%, but by the time of pricing they had firmed up again and were yielding 5.84%.

Total demand for the deal was $4.5 billion from 271 orders. Considering that last week's $1.5 billion issue from the Philippines attracted $5.3 billion of demand for the 10-year tranche and $4.6 billion for the 25-year tranche, it would be fair to question -- why only $4.5 billion?

According to one banker "the book size reflected quality rather than quantity" and another source noted that, given the quality of the demand, there was no need for the bookrunners to wait to accumulate a larger book before pricing. The buyers included long-term investors, predominantly big reliable names from the US, and a who's who of asset management and hedge funds.

The Philippines has traditionally been able to benefit from the strong domestic bid, and that was a driver on last week's issue as well. That is not the case for Indonesia, where there is little domestic demand for sovereigns.

US investors dominated the geographical distribution, taking 49%, while Europe took 27% and Asia 24%. Asset managers and hedge funds represented the greatest proportion in terms of type of buyer with 69%, followed by banks with 14%, insurance and pension funds with 11%, and retail with 6%.

Compared with other emerging market sovereigns issued so far in 2010, such as Turkey and Mexico, Indonesia's immediate secondary market performance was impressive. A source close to the deal attributed this not only to the quality of the investors attracted to the deal, but also to the Indonesian currency, which is currently rallying very strongly against the US dollar.

But, Brayan Lai, credit analyst at French investment bank Calyon, expressed concern about the future performance of the bonds. "Indonesia has the habit of tanking in secondary trading, and not recovering to priced levels for weeks. This was the case even when markets were in a net-bid for credits during 2009. The market can afford to be much more selective now, as we do expect a lot more supply during the first half of 2010".

Speaking for the deal are the fundamentals as both rating agencies and investors expect Indonesia to achieve an investment grade rating within the next couple of years. Lai, along with many other analysts, are less optimistic however, and expect this to take up to five years. Currently, Indonesia is rated Ba2 by Moody's, BB- by Standard and Poor's and BB by Fitch.

By the end of the Asian trading session on Wednesday, the new bonds were up half a point at 99.45 to 99.55.