The Republic of Indonesia swept through its funding target for the first half of 2016 on Monday with an upsized $2.5 billion sukuk issue.
As a result of the split- and 10-year deal, the sovereign has now raised 64% of the $9.35 billion it is targeting from international markets in 2016, or 2% more than the 62% it was hoping to raise by the end of June.
The Baa3/BBB-/BB+ rated credit has been one of the chief beneficiaries of the market’s strong momentum following the Fed's decision to slow the pace of interest rate rises last week. As a result, the order book for the sovereign’s 144a offering closed around the $8.5 billion mark, encouraging it to upsize the transaction by $500 million and press down on the new issue premium.
When it first launched roadshows on March 10, the Republic originally intended to issue one single 10-year tranche as it had previously done in 2014 and 2015. However, syndicate bankers said it changed its mind following feed back from Islamic investors who stated a clear preference for shorter-dated paper.
"Now oil prices have recovered, Middle Eastern investors are recovering their appetite, but they’re definitely more risk averse and focused on shorter-dated paper," one banker commented.
The sovereign, therefore, decided to incorporate a five-year tranche and guided investors to expect one $500 million five-year issue and one $1.5 billion 10-year issue.
Nevertheless, it still pitched indicative pricing to encourage more participation in its preferred 10-year tranche according to syndicate bankers and launched the deal on Monday with guidance around the 3.7% level for the five-year and 4.8% level for the 10-year.
This was subsequently tightened to 5bp either side of 3.45% and 4.6%, leading to an order book with a final skew of $2.1 billion demand heading into the five-year and $5.6 billion into the 10-year.
Using the issuance vehicle Perusahaan Penerbit SBSN Indonesia III, the sovereign priced a $750 million five-year issue at par with a profit rate of 3.4% to yield 202.6bp over Treasuries.
A $1.75 billion 10-year issue was also priced at par with a profit rate of 4.55% to yield 263.4bp over Treasuries.
Fair value
Syndicate bankers said fair value levels depended whether investors benchmarked the new deal against the sovereign's conventional dollar-denominated debt, or its existing sukuk curve.
They estimated fair value for the five-year at 3.32% based on its conventional curve and accounting for a 15bp pick up between conventional and sukuk debt. This leads to a new issue premium of roughly 8bp.
The key comparable was the sovereign's 4.875% May 2021 bond, which was yielding 3.16% on Monday, or a G-spread of 180bp according to one broker's prices.
Where its sukuk curve is concerned, bankers said fair value came out around the 3.38% level, equating to a new issue premium of roughly 2bp.
The sukuk benchmark is a 6.125% March 2019 bond, which was yielding about 2.695% on Monday.
For the 10-year tranche, bankers estimated fair value of 4.4% after benchmarking against the sovereign's conventional curve and a new issue premium around the 15bp mark.
Here the key benchmark was the recent 4.75% January 2026 deal. This was yielding about 4.072% on Monday, or 223bp on a G-spread basis.
Compared to the sukuk curve they estimated fair value around the 4.45% level, again equating to a new issue premium of roughly 10bp.
The main benchmark was the sovereign's sukuk from 2015, which comprises a 4.325% May 2025 bond, which was yielding about 4.31% on Monday.
Strong rally
A couple of weeks ago, the sovereign's most recent sukuk deal was bid on a cash price around the 97.5% level according to data from S&P Global Market Intelligence. On Monday, it was trading around the 99.75% level, a pick up of nearly two points.
One key consideration for investors must be how much further the rally across the Indonesian sovereign curve has left to run. Having hit a low in mid-December, most bonds are now back to the same levels they were trading at in May 2015 and about 1.25 points below their one-year highs in March 2015.
This is true of both the country’s conventional and sukuk debt. Indonesia is the most active sovereign in the global sukuk arena and this year has also been the best performing.
"I think pricing on the new transaction is very fair," one syndicate banker concluded. "Investors may have had to give up about 10bp of the new issue premium they would normally expect on an emerging market sovereign deal, but in return they've caught a rally, which has seen the whole curve tighten almost 30bp in the space of a few weeks."
By way of comparison, bankers highlighted the similarly tight new issue premium the Republic of the Philippines priced into its $2 billion mid-February deal.
In terms of allocations, 120 accounts participated in the five-year of which 42% were from the Middle East, 10% Indonesia, 31% other Asia, 15% Europe and 2% other US. By account type, asset managers took 40%, banks 38%, sovereign wealth funds 13%, insurers 5% and private banks 4%.
For the 10-year 240 accounts participated with 28% going to the Middle East, 10% to Indonesia, 25% to other Asia, 22% to Europe and 10% to the US. By investor type, 59% went to asset managers, 25% to banks, 8% to sovereign wealth funds, 4% to insurers and 4% to private banks.
When the Republic was last in the market in May 2015, it placed 41% of its 10-year deal into the Middle East, followed by 21% to the US, 16% to Europe, 12% to Asia and 10% to Indonesia.
Robert Pakpahan, Indonesia's director general of budget financing and risk management, is likely to be extremely happy he has been able to time his deal so well. In a recent interview with FinanceAsia, he said the Republic intends to raise $9.35 billion from offshore markets this year.
This new $2.5 billion sukuk and last November's $3.5 billion twin-tranche dollar deal means he has now raised a combined total of $6 billion.
Pakpahan told FinanceAsia the Republic intends to focus on dollars, yen and euro this year and currently has no plans to tap the burgeoning panda bond market in China. He also said the Republic wanted to raise 24% of its funding from the sukuk market, suggesting it is now done in this sector for the year.
Joint global co-ordinators for its latest deal are: CIMB, Citi, Deutsche, Dubai Islamic Bank and Standard Chartered. Joint leads are PT Bahana Sekuritas and PT Danareksa Sekuritas.
This article has been updated since first publication with final deal stats.
