Investors have every reason to be wary of Indonesian corporate deals. The country’s companies were hit hard during the Asian financial crisis, and since then have had a history of terrible defaults. Remember Asia Pulp & Paper, the company which defaulted on $13.9bn of debt in 2001? Few seem to.
Indonesian borrowers have also been in the crosshairs of bank lenders over the years — or perhaps one should say banks have been in these borrowers’ sights. Standard Chartered’s $1bn loan to Borneo Lumbung in 2012 was a misstep that few bankers will ever forget. Or take the $405m deal for Indonesian palm oil seller Royal Industries. The borrower defaulted on its principal repayments at the end of 2016 and subsequently filed for a restructuring under the local Suspension of Debt Payment Obligation (Penundaan Kewajiban Pembayaran Utang, or PKPU) regime.
But investors seem to have forgotten these burns as they hunt for yield. That’s a troubling development.
Investors’ desperation for yields has been a fact of life for years now. But even as US interest rates finally move in the right direction, investors appear to have thrown off the last of their inhibitions in search for yield, causing them to pile into ultra-low or unrated names in exchange for 7%, 8% or even 9% handles.
Indonesian issuers have been quick to take advantage of this. In 2017, Indonesian high yield borrowers sold $4.985bn of dollar notes, according to Dealogic. That’s almost four times their total volume in 2016.
Just in January, four Indonesian corporate issuers have visited the bond market with high yield deals. Three of them were debut names. More notably, every one of those debut issuers had previously tried to sell dollar bonds but failed. January’s market, which one banker called “as good as you can possibly get,” proved the opportune time for these companies to approach investors again. Investors voiced their pleasure that the issuers re-approached the market with more generous price terms this time around, but one must wonder if the new issue premium is really worth the risk.
For instance, palm oil producer Sawit Sumbermas Sarana (SSMS), which is rated B1 by Moody’s, was able to price a $300m 7.75% 2023 with an 8% yield two weeks ago, on an order book that totalled more than $1.1bn. When the company came out in November, it started initial price guidance in the 7.25% area. Considering that interest rates have risen since the first attempt, it’s hard to see much additional value-add the second time around.
Riding the general bullish sentiment, Indonesian issuers have even kicked open a new market, selling offshore rupiah bonds. Last week Ba2/—/BB rated Wijaya Karya sold a Rph5.4tr ($404.7m) 7.7% 2021 at par on the back of a Rph12.5tr order book. The deal managed to attract a fairly diverse order book with 13% of the trade allocated to Europe, the Middle East and Africa, and 10% to the US. About 88% went to fund and asset managers. Again, the success of the sale was attributed to the hunt for yield.
Of course, investors can’t be faulted for their need for good returns. And they have demonstrated resilience over the last two years as they have weathered geopolitical storms and the slow return to a rising rate environment. In some ways, it’s comforting that markets won’t be sent into a tailspin with every negative global event.
But it may also be time to stop grabbing this bull market by the horns. When the markets are this buoyant, it is hard to shake the feeling that the music is about to stop.