Indonesian Corporate Debt Catches A Strong, Tropical Wind

As the equatorial nation's sovereign debt gains international favor, local corporate bonds find a broader and deeper-pocketed array of investors.

Companies in Indonesia are benefitting from an auspicious local credit environment, as demand for debt from the archipelago nation has surged.

Indonesia’s government bond market was the finest performer among its Asia-Pacific peers last year, surging 15.24% in 2017. This led to Standard & Poor’s upgrading those bonds to investment-grade status and their subsequent inclusion in the Bloomberg Barclays Global Aggregate Index. These moves make the sovereign bonds more appealing to institutional investors, some of which would be required to hold the bonds to fulfill their charters.

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Indonesian corporates are now poised to take advantage of increased demand and lower yields as they benefit from the halo effect surrounding the sovereign. There are indications that Bloomberg Barclays might add non-sovereign debt to the index in the future, a dynamic that is expected to further compress borrowing costs for Indonesian entities.

The popularity of Indonesian credit has also allowed the opening of the so-called “Komodo” bond market, or issuance in offshore rupiah-denominated debt from domestic corporates. The first Komodo fund debuted in November.

“So far, Indonesia’s strong, domestic fundamentals have supported relatively moderate yields on government debt, which keep borrowing costs low,” says Anushka Shah, a Singapore-based sovereign-risk analyst at Moody’s.

Nevertheless, the cost of hedging Indonesian risk is relatively high for dollar-based investors, typically between 350 and 500 basis points for utilizing a cross-currency swap, a fee passed on to Indonesian issuers in the form of higher coupons.

Despite the poor relative performance of the local currency,

Komodo bonds benefit local issuers because of the opportunities to raise more capital than is available in the domestic market.

“A premium of around 4.2% to 4.3% versus like-tenor US corporate debt is required in offshore rupiah issuance to appeal to offshore investors, given that the market accepts that future rupiah depreciation is on the cards,” a Singapore-based fund manager tells Global Finance.

The popularity of Indonesian debt among offshore investors finds no clearer example than amongst the mainland Chinese. In January, coal producer Golden Energy and Resources received strong demand from Chinese investors for a Global bond, while sector peer Toba Bara Sejahtra is in the process of marketing a similarly priced deal to foreign investors.

The opportunity for investor diversification also exists, with recent Komodo deals for state-owned electricity company PLN and engineering firm Wijaya Karya finding strong onshore support for deals which were launched with the intention of catching the offshore bid.

Meanwhile, in the offshore syndicated loan market, the Indonesia label continues to attract demand. A $950 million loan for Indonesia Eximbank is in the process of receiving a formal mandate, while telecom tower entity Solusi Tunas Pratama is in the market with a $350 million, five-year refinancing loan.