The Republic of Indonesia helped to cement its status as one of Asia’s most experienced and dextrous borrowers on Monday after it grabbed the first opportunity it could to pre-fund some of next year’s borrowing requirements with a $3 billion triple tranche offering.
The Baa2/BBB-/BBB- rated credit has come to market during the first week of December for the past three years running. Its determination to do so again this year is likely to have been fortified by predictions that 2019 could witness further spread deterioration across Asia.
As one banker commented: “a number of issuers are taking the view that things could get a lot worse during the first quarter of 2019. Best to be prepared and ready to hit the market whenever a window arises.”
Debt capital markets bankers consequently applauded Indonesia’s decision to take advantage of a temporary truce in the Sino-US trade war following the G20 meeting in Buenos Aires over the weekend. They also said that the sovereign’s market entry was buoyed by more dovish comments from US Federal Reserve chairman, Jay Powell, last week.
It has been further helped by the recent performance of quasi-government Indonesian credits, which have had a positive few weeks since Baa2/BBB- rated PT Indonesia Asahan Aluminium Persero (Inalum) brought a measure of confidence back to the market.
Inalum’s $4 billion deal, from early November, has traded extremely well in the secondary market thanks to what has been variously described as a “necessary” or “frankly unbelievably” generous new issue premium to clear such a large amount of paper through the market.
The group’s three- five- 10- and 20-year tranches are respectively trading 2.5, four, 6.5 and 7.6 points tighter than their launch price.
Indonesia has also been able to take advantage of an improving macro view thanks to the government’s handling of the volatility besetting emerging markets.
However, as one banker commented: “Coming into this trade, the government knew it would need to pay a relatively generous new issue premium and was prepared for it. The key discussion was all around timing the trade.”
The decision to execute on Monday was taken in the knowledge that US markets would be shut for a national day of mourning on Wednesday to remember President George Bush, so Tuesday was not a viable option.
But market participants remain divided about how generous the sovereign’s pricing was. Some suggest a 10bp, 15bp and 17bp new issue premium on the five- 10 and 30-year tranches is not that enticing compared to recent emerging market offerings.
Nevertheless, the deal traded up on Tuesday. It closed the Asian trading day with the five-year flat to its 99.852% issue price, the 10-year up one-quarter of a point from its 99.748% issue price, and the 30-year up half a point from 99.539%.
Final pricing saw the $750 million five-year tranche print with a 4.45% coupon to yield 4.48% while the $1.25 billion 10-year tranche has a 4.75% coupon and 4.78% re-offer yield. The $1 billion 30-year tranche priced at 5.35% to yield 5.38%.
Initial guidance had been pitched 38bp wide of the existing five-year and 45bp wide of the existing 10-year and 30-year paper.
But Indonesia still had to bow to market conditions, raising less money in 2018 than it has in previous pre-funding rounds. In 2017, for example, it raised $4 billion from a split five- 10- and 30-year transaction, which had bigger five- and 30-year tranches than 2018.
In 2016 and 2015, it raised $3 billion each December and in 2014, it launched the year with a $4 billion trade.
A second sovereign that will have been carefully watching Indonesia’s reception is the Republic of the Philippines. It has also previously pre-funded in December and has announced plans for a $500 million to $2 billion issue if it can find the right market window before the year-end.
“I imagine they're probably kicking themselves right now for letting Indonesia go first,” said one banker. “Issuance windows are getting fewer and far between.”
A second Indonesian credit is also waiting in the wings. PT Lestari Banten Energi has completed roadshows for a 20-year deal with a 10.1-year average life via Citi, Barclays and CIMB.
So far, however, the Baa3/BBB- rated power producer has opted to keep the deal on hold. One of the more negative consequences of Inalum’s deal is that it has high pricing expectations from an investor base, which no longer feels that it needs to commit before the end of year unless it is offered a meaningful new issue premium.
Joint global co-ordinators for the Republic's bond were ANZ, Citi, DBS, Deutsche Bank and Goldman Sachs with co-managers comprising PT Bahana Sekuritas, PT Danareksa Sekuritas and PT Trimegah.
