Indonesia hits the bond market early with US$4bn deal

Wed Jan 8, 2014 2:17am EST

HONG KONG, Jan 8 (IFR) - The Republic of Indonesia stuck to its strategy of coming to the bond markets early in 2014, pricing a US$4bn two-part offering that might fulfil its 2014 US dollar funding requirements.

Indonesia, rated Baa3/BB+/BBB-, sought to hit the market early as officials with the sovereign expect borrowing costs to rise later this year.

Tuesday's US$4bn dual tranche transaction was Indonesia's largest offshore bond issue and the biggest by an Asian sovereign in at least 10-years, according to the lead managers.

The US$2bn 10-year tranche, with a 5.875% coupon, priced at 99.441 to yield 5.95%, tighter than initial price talk of 6.20%. The US$2bn 30-year tranche, with a 6.75% coupon, priced at 98.734 to yield 6.85%, tighter than initial price talk of about 7.1%. Both bonds traded around 100.75 today thanks to follow on demand.

"They got 80% or 90% of their (offshore) funding needs in one go. They got a lot of flexibility out of it," one lead manager said.

Indonesia will need to raise Rp360trn (US$29bn) through government bonds in 2014, Robert Pakpahan, director general of the debt management office told IFR in an interview late last year. The sovereign expected to raise 20% of this (US$5.8bn) offshore, Pakpahan added.

The chances of Indonesia returning to the offshore dollar bond market are slim given that Indonesia is also planning to issue euro-denominated bonds as well as a Samurai bond. However, bankers at the lead managers, Citigroup, Bank of America Merrill Lynch and Deutsche Bank, had no comment on Indonesia's dollar debt plans.

This week's dollar deal size proved to be popular. The size was increased to US$4bn from a planned US$3bn given US$18bn in orders from investors for the combined tranches.

Still, bankers had to provide a premium for investors given the transaction's size and that it was the first time the sovereign sold such long bonds since its currency came under attack amid concerns about the country's current account last year. The Indonesian rupiah has depreciated 20% since May 1 2013 and the country had burned through more than US$10bn in reserves by November.

At the same time, the price of Indonesia's outstanding 2043 bonds have dropped by almost 24.00 as the yield on the 30-year Treasury spiked 100bp and spreads for bonds at Indonesia's long end of the curve widened by more than 100bp over Treasuries.

It was therefore no surprise that Indonesia, with its huge borrowing needs, would need to pay a concession even though Sri Lanka, a sub-investment grade issuer, got away pricing tight to its own curve for its US$1bn five-year bond on Monday. Sri Lanka benefited from its rarity in international debt markets.

Indonesia's outstanding 2043 bonds were bid on Monday at 76.75 to yield 6.39%. The sovereign's 2023 bonds issued last October were bid at 97.50 to yield 5.7% at Monday's close. Adjusting for the Treasury curve would provide fair value at around 5.85% for a new 10-year. The new 10-year was priced slightly wider at 5.95%.

Bankers close to the deal said the issuer ended up paying a new issue concession of 10-15bp for the 10-year and 5bp-10bp on the 30-year bonds.

US investors flocked to the offering in droves, buying more than 60% of each tranche.

The 10-year bond attracted more than US$10bn in orders from 448 accounts, with US demand accounting for 66% of the deal. Investors from Asia and Europe bought another 17% each. The 30-year tranche pulled in more than US$7.5bn in orders from 335 accounts, driven again by US investors with 70% of the orders. Investors from Asia bought 14% and those from Europe bought 16%.

Real money investors piled into the deal. Fund and asset managers bought 77% each of the two tranches. Banks bought 9% and 5% of the 10-year and 30-year tranches, respectively, while insurance and pension funds bought 12% and 17% of the respective portions. Private banks bought 2% and 1%, respectively. (Reporting By Neha D'Silva, editing by Abby Schultz)

FILED UNDER: