Bond market shows signs of new life

Bond market shows signs of new life

By Wachyudi Soeriaatmadja

JAKARTA (JP): The sharp drop in the interest rate has provided
a more conducive climate for local companies to enter the
sluggish bond market.

At least three companies have launched their bonds within the
past two months, and bond analysts estimate the number of new
bond issues could reach more than seven before the end of the
year.

Desimon, the head of Fixed Income at state owned securities
company PT Danareksa, estimated there would be at least Rp 3
trillion (about US$345 million) worth of new bonds being issued
during the second half of this year.

"The market is badly waiting for new quality bonds," he said
adding that the recently issued eight-year Rp 135 billion state-
owned pawn house company Perum Pegadaian bond was oversubscribed.

The financial crisis, which hit the country in late 1997, has
totally put the local bond market at a standstill. The sharp
increase in the interest rate as the impact of the financial
authority's measures to curb inflationary pressures made the debt
instruments no longer attractive.

The interest rate, which reached as high as 70 percent in
early 1998, has gradually declined in line with the easing of
inflation rates. The bank deposit rate has dropped to an average
of 13 percent this month, much lower than about 16 percent prior
to the crisis.

The low interest climate has sent signs of life through the
bond market.

In addition to Perum Pegadaian's bonds, Danareksa is also
underwriting the Rp 250 billion bonds issued by publicly listed
Bank NISP.

Danareksa said that the interest rates of the two bonds are
much more attractive than the rates offered by banks.

Bank NISP five-year bonds, to be offered to the public between
Sept. 17 and Sept. 29, would bear fixed and floating interest
rates.

The floating rate would be about 1.5 percent to 2.5 percent
above the three-month Bank Indonesia promissory notes (SBIs)
interest rates on Sept. 1.

The proceed of the bond would be used for the bank's credit
expansion, according to Bank NISP last month.

Another bond on schedule for issuance this month is publicly
listed PT Indah Kiat Pulp & Paper's Rp 1.5 trillion bond, which
will be offered to the public between Sept. 28 and Sept. 30.

PT Bahana Securities, the lead underwriter for Indah Kiat's
bond issuance, said that the five and seven-year bonds would bear
the coupon rates of between 16 percent and 18 percent.

The proceeds of the bonds will be used to refinance the
company's matured debts, according to Indah Kiat.

Fixed income director of Bahana Securities Ray Gunara said,
however, that Indonesian corporate bonds would not be attractive
to foreign investors due to the still high premium risk of the
rupiah.

"The high premium risk of the rupiah makes the cost of hedging
the currency expensive," he said.

The target market of these bonds, Ray added, would be mostly
local institutional investors such as domestic banks and
insurance companies.

The bond yield rates are attractive enough if they are
compared to bank deposit rates but analysts doubt if the bond
instruments have become the first investment choice.

Desimon said in comparing the rupiah denominated Indonesian
corporate bonds, foreign investors would prefer buying the U.S.
dollar-denominated Indonesian government Yankee bonds in the
United States market at a coupon rate of 12 percent.

"But we don't worry about that. We have a very high liquidity
in our domestic banking sector to absorb those new bonds,"
Desimon said, referring to the high amount of cash domestic banks
have put in the currently 13 percent interest rate of SBIs.

According to Bank Indonesia official data, the amount of funds
invested in the SBIs (by institutional investors that consist of
mostly banks) as of August stood at Rp 88.4 trillion.

Desimon said that if only 10 percent of those funds invested
in SBI were converted into higher-yield-other-investment
instruments like bonds, the new issuance of bonds would be well
absorbed.

The new bonds which will enter the market within next few
months include those to be issued by cigarettes maker PT H.M.
Sampoerna (between Rp 500 billion and Rp 1 trillion), palm oil
manufacturer PT Smart Corporation (above Rp 500 billion), paper
manufacturer PT Tjiwi Kimia (Rp 900 billion) and life insurance
company PT Panin Life (estimation not known).

An analyst with a private securities company said it seemed
that the companies are rushing to enter the market before the end
of the year, if not they will face head-to-head competition with
trillions worth of bonds to be floated next year as part of the
government-sponsored bank recapitalization program.

The government has issued Rp 103 trillion worth of bonds (in
fixed and floating rates) in recapitalizing the domestic private
banks. These government bonds, which yield lower interest rates
but lower risk than corporate bonds, would be tradable after
February next year.

He added that the economic crisis has also made investors
extra careful in purchasing corporate bonds as 14 corporate bonds
(some 15 percent of the Indonesian market at the time) defaulted
in 1998.

"A lot of bond issuing companies could not meet their coupon
payments or principal repayments at maturity then," the analyst
said.