The Republic of Indonesia (RoI) tapped the international bond market for the first time after regaining its investment grade rating in December 2011, as it priced on January 9 a 30-year bond offering amounting to USD1.75 billion.
The Reg S 144A bonds are priced at 98.148 percent with a coupon of 5.25 percent to offer a yield of 5.375 percent, representing a spread of 240.4bp over the US treasuries. This is at the tight end of the marketing range of between 5.375 per cent and 5.50 percent – the lowest ever yield for a 30-year bond out of Asia.
The transaction is the second sovereign bond issuance out of the region this year following the Republic of the Philippines’ (RoP) offering of 25-year notes for USD1.5 billion last week, which were sold at a yield of five percent. This is also Indonesia’s first trip to the bond market after Fitch Ratings raised its sovereign credit rating to investment grade, or from BB+ to BBB- in December 2011.
“Going into the market early in the year was a good move for Indonesia as they were able to capitalize on the wave of positive sentiments surrounding their rating upgrade by Fitch Ratings in December, as well as on the good US payroll numbers that came out last Friday,” says a banker familiar with the deal. “The market also opened strongly in Asia on Monday, creating a good window for them to launch the transaction.”
The deal arrangers – HSBC, J.P. Morgan and Standard Chartered Bank – announced a benchmark size transaction at lunch time in Asia with an indicative price of between 5.375 percent and 5.50 percent. Towards the end of Asia trading, after seeing such a strong response from Asian and European investors, they indicated to the market that the deal size would be at least USD1.5 billion. In the end, because of the strong support from the US accounts, they were able to upsize the amount to USD1.75 billion – the largest ever long-bond out of Asia.
At that pricing level, the RoI ended up paying a tiny new issue premium of just 1.5bp, compared with between 4bp and 7bp thereabout that the RoP paid last week. “From the investors’ perspective, it was a pretty punchy pricing, but it was a deal that they were happy to support and they want to hold the bonds,” the banker says.
The offering garnered an order book in excess of USD3.6 billion from high quality accounts. While some sovereigns have a history of inflated books, especially from domestic accounts, there was not a whole of inflated orders on this transaction, which attracted top-tier global asset managers who are consistent participants in the emerging market sovereign universe.
“These are the types of account that follow Indonesia, meeting with them regularly as they did towards the end of 2011,” the banker points out. “They are really comfortable with the credit, seeing how it has improved and going in an upward trajectory.”
More than half of the bonds, or 51 percent, were sold in the US, while 37 percent were distributed in Asia, including 15 percent in Indonesia, and 12 percent in Europe. Asset managers were the biggest buyers with 73 percent, followed by banks with 20 percent, insurance companies and pension funds four percent and private banks three percent.
The arrangers adopted an intra-day execution strategy on the transaction. The banker explains: “Investors know the RoI very well. They were given long enough time to participate, but also not exposing the sovereign to any execution risk in what was still a reasonably choppy market with a lot of headline risks.”
On a spread basis, the RoI achieved a much better pricing than South Africa, which also priced on January 9 a 12-year bond deal amounting to USD1.5 billion. That deal yield 270bp over the US treasuries, or 30bp more than the RoI. South Africa is a long-standing investment grade issuer rated at A3/BBB+/BBB+. “This highlights the good support that Indonesia has and how it is being perceived as a credit with a lot of upside,” the banker adds.
Moody’s Investors Service, which assigns a Ba1 rating to the issue, says the country’s sovereign rating has been supported by the increasingly robust domestic demand during the past few years, which has helped to shield the economy from the global financial crisis. It says that in contrast to many of its ratings and regional peers, Indonesia has been able to maintain a its economic momentum despite a deterioration in external demand in the second half of 2011.
Last year, Indonesia sold USD2.5 billion of 10-year bonds in April at a yield of 5.1 percent and another USD1 billion of seven-year Islamic notes in November at a yield of four percent.
The new bonds were drawn from RoI’s USD15 billion global medium-term notes programme, which was raised from USD9 billion last year.