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.