Beacon of activity

The weakening of the rupiah against the US dollar amid political uncertainty has not stopped lenders from flocking to Indonesia’s borrowers.

Indonesia has come a long way from being the favourite whipping boy of the financial community in the aftermath of the 1997 Asian financial crisis. Far from being a troubled backwater, South-East Asia’s largest economy is the only

bright spot in the region’s loan markets.

Indonesian corporations are taking advantage of the feel-good sentiment towards the country to tap the offshore lending markets in droves. In the process, borrowers are providing attractive opportunities for lenders to book assets in a growing economy.

Since the 1997 Asian financial crisis, Indonesia has steadily notched increasing loan volumes as an improvement in its sovereign ratings has widened the investor base for its borrowers.

Indonesian loan volumes have, since 2009, topped a combined US$40bn, of which nearly US$30bn has been transacted in the last three years.

In comparison, neighbouring Malaysia, which relies more on domestic funding markets, has resembled a sleepy backwater with combined loan volumes of only US$15.89bn in the last three years.

Indonesia has ratings of Baa3 from Moody’s, BB+ from S&P and BBB– from Fitch), while Malaysia is at least three notches higher at A3/A–/A–.

“From a regional perspective, Indonesia is one of the few markets that has offered attractive financing opportunities for loan bankers,” said Ashish Sharma, head of loan syndication, Asia Pacific, at Credit Suisse.

“Pricing and deal flow of loans for Indonesian credits have also stayed stable, despite the increased cost of funding and tightening liquidity in local currency among certain market participants,” Sharma said.

“The Indonesian story is strong and appeals to foreign investors, which is reflected in the reception for loans from the country,” he added.

On a roll

Loan bankers predict 2014 will be another busy year.

“The volume momentum seen in Indonesian loan markets will continue in 2014 as borrowers look to raise more capital and capitalise on Indonesia’s growth story, especially in the growing consumer segment,” said Boey Yin Chong, head of syndicated finance at DBS Bank.

Last year was the best for the country’s loan markets since 1998, with US$12.68bn generated from 48 deals. The volume is impressive, considering the currency volatility that hit Indonesia in July and August. The rupiah eventually hit a three-year low. At Rp11,355 to the US dollar, the Indonesian currency is still about 17% lower than where it was a year ago.

Despite the rupiah’s woes, high-profile Indonesian borrowers continue to tap the loan markets and have been well received, demonstrating the country’s appeal to lenders.

Two US$1bn-plus financings for Indonesian oil giant Pertamina (Persero) and conglomerate CT Corp are in the last legs of syndication. Both achieved impressive outcomes after emerging late last year in the aftermath of the currency troubles.

“Despite a tough 4Q in 2013 due to the currency and macro uncertainties; Indonesian issuers could get extremely tight pricing (Pertamina) and size (CT Corp),” said Aditya Agarwal, head of Asia Pacific loans, at RBS.

One of the big factors behind that dynamic has been the dealflow from other major economies, notably China and India.

Taiwanese lenders, which account for a bulk of the retail liquidity in Asian loan markets, are feeling indigestion from loading up on too many Chinese credits and they have been hesitant to lend to India as that nation’s economy has struggled and its political future remains uncertain.

Against that backdrop, Indonesian loans offer an attractive risk-reward to lenders. Remarkably, the environment still allows Indonesian companies to secure lower costs of borrowing.

One example is Pertamina’s US$1.137bn five-year loan, with an average life of 2.75 years. The loan offers a top-level all-in of 170bp based on a margin of 145bp over Libor. The pricing is well inside that for the US$965m five-year loan Pertamina signed in January 2013, which paid a top-level all-in of 200bp, based on a margin of 180bp over Libor and a three-year average life.

CT Corp’s latest US$1.275bn three-tranche loan pays a top-level all-in of 401.45bp, based on a blended average life of 3.3 years and a blended margin of 356bp over Libor.

The political climate in Indonesia, like India, is uncertain as the country is slated to hold parliamentary elections in April and then presidential elections in July. In India, a change of government is expected when elections take place beginning this April, and investment activity overall has slowed to a crawl.

Although drastic changes are not expected in Indonesia, bankers anticipate the elections will also improve prospects for the loan markets.

“Once the political uncertainty goes away later this year, pricing on Indonesian loans will tighten significantly because of improved economic fundamentals and a stable currency,” Agarwal said.

“Despite, and, in some ways, due to, the elections during the year, we can see increased consumer spending, which, in turn, will necessitate more fundraising especially by the consumer sector-related industries,” said Boey at DBS.

Irrespective of the election outcome, Indonesia will remain a darling for the offshore lending community. If a long-awaited rating upgrade from S&P comes through – the agency still rates it sub-investment grade at BB+ – it would only expand the universe of lenders further, potentially leading to greater deal flow and tighter pricing.

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