Indonesian corporate bond spreads tighten

Indonesian corporate bond spreads tighten

NEW YORK (Reuter): Indonesian corporate bond spreads tightened
further in anticipation of the expected pricing of the country's
first sovereign issue this week, global bond dealers said.

The US$350 million Baa3/BBB rated 10-year deal, meanwhile,
should grab investor interest despite tight price talk and a
politically charged environment, analysts said.

Riau Andalan Pulp and Paper's 13-1/4 percent debt, behind 750
basis points in December, is now 447 bid, 419 offer. Of that 303
basis points, more than 50 basis points have been trimmed since
late June.

Because the expected narrow pricing for a BBB credit, dealers
said high-yield investors will likely balk at the issue. High-
grades buyers and insurance companies may find the credit an
opportunity for relatively high return, however.

"I think they could sell $10 billion with their eyes shut,"
said Steven Gallen Edersheim, director of international fixed-
income at Schroder Wertheim & Co. "Insurance companies are a
different set of investors than those buying (Indonesian
corporates).

They're comparing to Yankee deals like China, Thailand and
Malaysia where they're desperate for spread."

To illustrate, Edersheim said single-A-rated Thailand paper is
around 70 bid, 60 offered. Similarly rated China 10-year paper is
bid around 100 basis points, he said, but its credit is
diminished next to Indonesia.

Feroz Talyarkhan, associate director of fixed-income research
at Bear, Stearns & Co Inc, said the spread may be very tight
given the debt's scarcity, but warns an aggressive pricing
heightens investor risk in secondary trade.

Past issues from Argentina and China have widened considerably
when released in secondary trade, he said.

"The dangers are the Indonesians may get trapped into going
with a very tight spread only to see the secondary trading of
this issue widen out and take the shine off the deal," Talyarkhan
said. "For it to be viewed as a really successful issue and
resist the temptation of coming out at a very tight spread, which
the deal could fly at...I think a more balanced spread would be
120 over Treasuries range."

Political uncertainty

Dealers and analysts said political uncertainty for Indonesia
raises investor risk to some degree. But the cause of concern,
the imminent succession of long-standing President Soeharto,
should not upend the country's positive growth or political
stability, according to Cem Karacadag, an analyst with Standard &
Poor's sovereign ratings group.

Nancy Northrop, vice president and emerging markets analyst at
Alliance Capital Management Corp, said investors who see through
any political rumblings will create demand.

In addition, the scarcity of the paper underpins the issue,
Northrop said.

"I think anybody who will take a buy and hold strategy will
buy this paper," Northrop said. "Even if I think the (Soeharto
succession) may be fairly simple, I think the markets will be a
little disturbed by the transition."

Northrop said Indonesia's improving credit trend and prudent
fiscal and monetary policy makes it an attractive investment
despite a sizable outstanding debt load.