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.