Bond issues in second half likely to drop

Bond issues in second half likely to drop

The Jakarta Post, Jakarta

After a record supply of corporate bonds in the first half of
this year, experts say that new issues in the second half would
most likely decrease as most blue-chip companies had already
issued bonds, and due to a further drop in interest rates and
political tension ahead of the 2004 general election.

Managing director of BNI Sekuritas Noor Hasyim told The
Jakarta Post on Thursday that companies might be reluctant to
issue new bonds for fear of a lack of demand if interest rates
continued to fall.

"New bond issues in the second semester will carry lower
interest rates, which in turn will reduce their attraction to
investors," said Noor.

The central bank has been lowering its benchmark interest rate
over the past year. This week it has reached a six-year low of
9.30 percent compared to more than 13 percent earlier this year,
and over 17 percent earlier last year. The lower benchmark rate
has prompted banks to cut interest on deposits. While this
condition should attract depositors seeking higher returns on
bonds, some analysts say that a further drop in the interest rate
could discourage investors from bonds and see them looking for
other investment alternatives.

Noor said that bonds with an AA rating issued in the first
semester usually carried a coupon rate of around 13.5 percent.
However, in the second semester similar bonds would likely carry
a lower rate following the central bank's aggressive rate cut.

Mirza Adityaswara from Bahana Securities also predicted there
would be fewer bond issues in the second semester as increasing
political tension in the run-up to the general election would
discourage companies from issuing new bonds.

But he said that transaction activity in the secondary bond
market would likely remain robust.

Although the benchmark rate has been declining, banks still
charge borrowers higher interest. This has prompted companies to
issue bonds in a bid to obtain cheaper funds both for working
capital or to refinance maturing debts. Meanwhile, people
seeking higher returns amid lower time deposit rates have turned
to bonds.

The Surabaya Stock Exchange (SSX) revealed on Wednesday that
total bond issuance in the first semester of this year reached Rp
21.7 trillion (US$3.3 billion), exceeding the Rp 21.5 trillion
worth of bonds issued during the whole of 2002.

Analysts said that bond yields in the first semester had given
investors a significant total return of around 16.20 percent from
corporate bonds and 11 percent from state bonds.