The Republic of Indonesia (ROI) has topped and tailed 2015 with split 10 and 30-year dollar bonds, which highlight just what a difference a year can make to investor sentiment.
In January, the Baa3/BB+/BBB- rated sovereign's first deal of the year attracted an enormous $20 billion order book.
However, this strong level of primary demand did not feed through into secondary market performance for very long. Investors who purchased January's $4 billion deal are sitting on losses, which almost certainly weighed on sentiment towards the new $3.5 billion deal, which entered the New York trading day with a far more subdued order book of $5.8 billion and closed at the $8.1 billion level.
Investors will be hoping history is not about to repeat itself and the sovereign has met them half way by offering a decent new issue premium as a counterweight to the more difficult market conditions it is now facing compared to January.
At that time demand was strong but a year-and-a-half of outperformance was about to end as investors started to face up to the possibility of rising US interest rates. One month later, they were beginning to flee the emerging markets en masse, dragging bonds and currencies down with them.
ROI spreads regained momentum in October but that short rally appears to have petered out and spreads across emerging market sovereign debt have been back on a rising trend over the past month.
However, timing a deal now still made sense for the ROI as it has been able to successfully pre-fund part of its 2016 requirements before potential volatility surrounding rate rises in December.
The new deal was also structured so the two tranches both have long first coupons in July 2016 and maturity dates in January 2016 and 2046 respectively.
A $2.25 billion 10-year tranche was initially marketed in the 5% area before price guidance was tightened to 5bp either side of 4.875%. Final pricing was fixed at 99.599% on a coupon of 4.75% to yield 4.8%.
The order book for this tranche closed with $5.5 billion of demand and participation from 164 accounts. By geography, US investors took 62% followed by Asia ex-Indonesia 10%, Indonesia 14% and Eruope 14%.
By investor type 75% went to asset managers, 18% to banks, 4% to insurers and pension funds, 2% to sovereign wealth funds and 1% to private banks.
A $1.25 billion 30-year tranche was initially guided around the 6.125% area before being tightened to 6%. Final pricing came at 99.299% on a coupon of 5.95% to yield 6%.
This attracted far less demand of $2.6 billion with participation from 151 accounts. By geography, this tranche had a split of 50% US, 22% Asia ex-Indonesia, 2% Indonesia and 26% Europe.
By investor type, assets managers took 71%, insurance and pension funds 21%, banks 6%, private banks 1% and sovereign wealth funds 1%.
The main comparable for both tranches is the two-tranche January deal.
The 4.125% 2025 bond ended Asian trading on Tuesday at a mid-price of 96.625% to yield 4.582%. This was almost half a point down from Monday's 97% close as the new paper weighed on secondary market spreads despite dealers short covering themselves.
At the peak of the summer's volatility, mid-yields spiked out to the 4.87% area before tightening to a low around the 4.10% mark in late October.
Syndicate bankers said the curve between the January 2025 bonds and January 2026 bonds is worth about 6bp. This brings fair value out at 4.64% and means the new deal has priced with a 16bp new issue premium.
The 5.125% 2045 bond ended Asian trading on Tuesday at a mid-price of 91.375% to yield 5.737%. This was roughly three quarters of a point off Monday's 92.13% close.
Bankers said the curve between the January 2045 and January 2046 bonds is worth about 3bp bringing fair value out at 5.77%. This gives the new bond a 23bp new issue premium.
Rising international fund raising
Prior to the new deal, the sovereign raised a total of $8.223 billion from the international bond markets in 2015 across three currencies and seven tranches according to its net roadshow.
Its international fundraising has been on a rising trend for the past five years, quadrupling from the $2.5 billion it issued in 2010. In 2014, it raised $6.625 billion and in 2013 $5.5 billion.
Next year it has a gross fundraising target of Rp532.4 trillion ($38.5 billion) of which up to 24% will constitute international bonds.
In its roadshow, the ROI says its international fund raising activities have been driven by a desire to avoid crowding out the domestic bond market. This is positive spin covering the lack of progress developing a deeper domestic bond market and a wider local institutional investor base to invest in it.
By contrast, the Philippines has made great strides over the past decade and has been rewarded with a full set of investment grade ratings, which has enabled it to trade well through Indonesia.
One decade ago, the opposite was the case with Indonesia generally trading about 150bp tighter than the Philippines.
In late 2005, the Philippines was rated one notch higher than Indonesia at B1/BB-/BB- and funded 10-year debt around the 8.875% mark. The then B2/B+/BB- rated Republic of Indonesia was funding 10-year debt around the 7.625% level, some 125bp tighter.
Now the Baa2/BBB rated Philippines' 10-year debt is trading around the 3.375% level, while Indonesia is 121bp wider.
Ratings momentum
The ROI hopes that it may soon generate better momentum if it can gain a full set of investment grade ratings. Standard & Poor's put its BB+ rating on positive outlook last May.
One of the agency's conditions before making an upgrade was better revenue collection. In its roadshow, the ROI flags this as a key government priority.
The government says it wants to broaden the tax base and will be implementing a series of measures, including a tax amnesty, e-invoicing, the creation of a semi-autonomous tax office and adjusting the non-taxable income threshold.
It also flags the six stimulus packages that have been launched since the beginning of autumn and how this is now starting to feed into higher GDP growth. The latter hit 4.73% in the third quarter, up from 4.67% in the second quarter.
Java led the way, contributing 58% of the country's GDP on a 5.4% growth rate. However, it is other provinces and islands where the real growth motors lie, with Sulawesi recording 8.2% growth in the third quarter compared to 6.9% in 2014 and Bali with 11.8% compared to 5.9% in 2014.
The government also highlights that its current account deficit has dropped from $24.4 billion in 2014 to $12.6 billion in the third quarter. Foreign exchange reserves are also on a rising trend and back to their 2011 levels, standing at $100.7 billion in the third quarter.
In 2016, the country is forecasting a fiscal deficit of 2.1% and government debt to GDP of 26%, up from 24.7% in 2014.
The ROI also emphasises that, while all emerging market countries have been hit as investors retreat back to the US, Indonesia has been less badly affected than most of its peers. For while the rupiah is down 10.1% against the dollar so far this year, it argues that this is nowhere near as bad as the Brazilian real, down 29% over the same period.
This may be of small comfort to investors concerned about the $28 trillion debt that emerging market countries, or rather many of the private sector entities, have racked up since 2009. In an effort to prevent a repeat of the devastating problems it suffered during the Asian financial crisis, Indonesia capped offshore high-yield debt issuance earlier this summer.
Joint global co-ordinators for the bond deal are: Bank of America Merrill Lynch, CIMB, Citi and HSBC.
Co-managers are PT Bahana Sekuritas, PT Danareksa Sekuritas, PT Mandiri Sekuritas and PT Trimegah Sekuritas.
This article has been updated with final distribution statistics
