IFR Asia, August 2009

Indonesia’s rupiah bond market is on course for a year of growth. By late July 22 deals worth US$1.4 billion between them had been raised in 2009, not counting government issuance, according to Dealogic, well on course to beat the 30 deals worth US$1.7 billion in 2008.

They have included some deals of reasonable size, including six worth the equivalent of more than US$100 million. The largest, for Bank Ekspor Indonesia, raised IDR2.5 trillion (US$195 million) in June through Danareksa and Trimegah Securities; others have come from Indofood Sukses Makmur, Perum Pegadaian, Bank Tabungan Negara, Medco Energy Intenasional and Perhsahaan Listrik Negara. That represents a mixture of bank and corporate issuance.

While the market has been reasonably active, participants are expecting much more to come from it. Dennis Reshijaya, head of institutional debt capital markets at Mandiri Securities, says investors are waiting to get a sense of the total government issuance for the year before showing appetite for corporate bonds. In particular, they are waiting to see if a samurai bond, long talked about by the Indonesian sovereign, is successfully completed. “If they get the Samurai bond done, local IDR bond issuance will be less,” he says. “And if the government is not going to issue so much supply into the market, investors might change their view” towards corporate bonds. “In the second half there will be a lot of bond issuance, corporate bonds.”

Reshijaya says investors prefer state-owned companies with a minimum rating of single A or A plus, “especially for the pension funds”. Issuers like PLN, which are essentially government owned, can find a following, although tenor tends to be on the short side and it would be tricky to get bigger deals away than those that have already been done this year. Also, secondary market liquidity is generally weak.

The rupiah markets might have been expected to grow while the dollar markets were effectively shut, as happened in Malaysia and China, among other places. That hasn’t proven true to any significant extent, and now it appears dollar funding may be back as a viable alternative for names of reasonable size and reach. Philip Lee, chief executive officer of investment banking for Southeast Asia at JP Morgan, expects high yield issuance to pick up from Indonesia in the second half of the year cross-border, too, reflecting changing attitudes towards credit which have an impact on the local market as well. “If you’d mentioned high yield six months ago you would expect to get kicked out of the room,” he says.

Rohit Chatterji, managing director of investment banking at JP Morgan in Singapore, notes that “in the domestic market liquidity doesn’t go out very far in tenor,” and adds that it is tempting for many Indonesian names to consider US dollars for other reasons too: “There is a natural hedge for many of them because they are exporters of commodities.” Consequently the development of the domestic markets has to deal with not only skittish local appetite but the apparently increasing allure of dollar issues too.

One area of potential growth is the rupiah Islamic bond market. While the dollar sovereign issue earlier this year captured the headlines, Indonesia has long had plans for Shariah-compliant programmes domestically too. In January it said it hoped to complete four rupiah-denominated sukuk placements in 2009, raising up to Rp10.8 trillion; a first retail sale, underpinned by a Rp13 trillion portfolio of government buildings, took place in February, attracting Rp5.57 trillion. Rahmat Waluyanto, who heads the debt programme for Indonesia, has said another Islamic retail bond will follow in the second half of this year, while other issuance has included private placements to Indonesia’s own department of Religious Affairs, although these issues are not tradable.

But this market is not growing as fast as some would hope. “The Islamic bond market is not growing that much,” says Reshijaya. “The size that can be placed through Islamic bonds has not improved.” Certainly, it is likely to take time before sovereign issuance of Islamic paper is sufficiently entrenched to attract much corporate or bank sukuk issuance to price off the back of the sovereign yield curve. Still, Malaysia has demonstrated the liquidity that can be tapped by building a successful sukuk market; the majority of debt issuance in Malaysia now is Shariah-compliant rather than conventional.

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