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.