This year presented a number of hurdles for Indonesian corporations. As of December 14, the country of nearly 275m people had reported 618,000 cases of the Covid-19 virus. The semi-lockdown policy that was put in place to battle the spread of the pandemic squeezed manufacturing and exports. Moody's predicts the country's GDP will contract 2% in 2020.
Still, a number of Indonesian borrowers, including the sovereign, sold international bonds in 2020.
As of early December, the country's issuers had raised more than $22.95bn in the G3 bond market, surpassing the $16.28bn that was raised in 2019, according to Dealogic. The majority of deal flow was in dollars — some $20.91bn — and from investment grade issuers like the government and state-owned enterprises.
The year-on-year increase in deal volume, despite the pandemic, has not come as a complete surprise.
Indonesia held its presidential elections in 2019, with incumbent Joko Widodo inaugurated in October 2019. Some issuers may have held back because of the political uncertainty, waiting until the end of 2019 and the beginning of 2020 to sell bonds, says Olly Prayudi, director for corporates at Fitch Ratings. Additionally, corporate bond issuance this year has been dominated by government-linked names, all of which tend to market large transactions, he says. Quality issuers have not had a problem selling offshore bonds, says Jamie Grant, head of emerging markets and Asia fixed income at First Sentier Investments. Indonesia's fiscal response to the pandemic was clear, quick and concise, clearing the way for transactions, he says.
"The market function has been very good," says Grant, in reference to the pick-up in bond activity after the March shutdown. "Demand has been strong. Issuers haven't had problems coming to the market."
It’s a different story when it comes to high yield deals, however. Volumes have admittedly risen from $1.46bn in 2019 to $2.79bn by early December, shows Dealogic. But there's more to the numbers than meet the eye. All but one high yield bond this year was sold in January or February — before the rapid spread of Covid.
"We haven't yet seen evidence of wide-spread issuance from the Indonesian high yield space to give us confidence that there will be good market access," says Sheldon Chan, portfolio manager in T Rowe Price's Asia credit bond strategy team. This questionable backdrop for high yield issuers will be in investors' minds as they go into 2021, he says.
Shaky market
Indonesian high yield bonds this year were concentrated on six borrowers and eight transactions. Six of the trades were executed in the first two months of the year.
Before the pandemic spread globally, there was strong demand for Indonesian high yield credits, says Sean Henderson, co-head of debt capital markets, Asia Pacific, at HSBC.
Tower Bersama Infrastructure, for instance, sold a $350m 4.25% 2025 bond in January. Liquidity was strong and the market looked set for a productive year.
"Covid had a much larger impact on the high yield sector," says Henderson, adding that this was a theme throughout the region as investors moved into more defensive credits. High yield deals, even from China, largely came to a halt in March, April and part of May, as the market grappled with the impact of the virus going global.
Since then, Indonesian coal producer Indika Energy has been the only issuer to tap the dollar market. The Ba3/—/BB- company sold a $450m 8.25% five non-call two year bond in October, and followed just weeks later with a $225m tap of the deal. The trade was successful, but there was a price to pay, says Chan. He reckons the issuer paid about 125bp to extend its curve by a year — a fairly high spread compared to pricing in a normal market. But the premium could also reflect Indika's coal business as investors steer away from so-called dirty investments, Chan says.
Of course, investor response varies depending on the credit.
The gap has widened between those credits in more defensive sectors that have largely remained resilient, and high yield issuers that have been more directly impacted, and this is evident in secondary yields, says Henderson. The difference can be as wide as 3%-4% or even more.
"The key message here is really differentiation," adds Chan. State-backed names perform well, as they have built-in support. But there is also bifurcation in the private sector, between companies coming from more or less challenged parts of the market, he says.
The "haves" of the Indonesian bond market have seen their bonds trade up by three to five points since the start of the year. But the "have nots" have dropped 20 to 30 points, says Chan. It all boils down to the liquidity available and the company's debt profile.
First Sentier
First Sentier's Grant says that Indonesian firms generally give investors a premium over other credits, as a way of compensating for volatility. The premium has narrowed in recent months, leading him to pare back some risk. He cautions investors looking at some of the lower rated credits to seek clarity on their business structures, some of which can be convoluted. "It's not a negative reflection on Indonesia, [but] you've got to understand the management," says Grant.
Which sectors have performed this year, and where is trouble brewing?
The good, the bad and the ugly
Utilities, power producers and telecommunication names have held up this year. But textile companies, property, commodities and retail names have had mixed results.
There have been winners and losers, says Chan, pointing to the commodity and textile sectors as the most damaged. At the same time, government support, such as through favourable mortgage rates, has helped keep residential property sales moving, he adds.
Some Indonesian property names have been battered in the secondary bond market as investors shy away from the sector out of fear of their limited market access. Fitch has taken nearly 50 rating downgrade actions on Indonesian issuers this year, with home builders and contractors accounting for the majority of downgrades. That number may include multiple downgrades for one issuer, not 50 separate companies.
"The main driver behind the downgrades of those issuers was due to liquidity issues," says Fitch's Prayudi.
Notably, property company Modernland Realty defaulted on a payment of its $150m 2021 bond. The company is now rated Ca by Moody's, D by S&P Global Ratings and RD by Fitch. Alam Sutera and Agung Podomoro Land (APLN) have faced similar refinancing pressure and downgrades. Alam Sutera is now rated Caa1/CCC/CCC+, and APLN B3/—/CCC+.
There is some relief to come for the sector though, as a handful of companies pre-funded in 2020.
Alam Sutera, for instance, offered investors an exchange offer in October to push back some maturities. That leaves the biggest wall of refinancing for Indonesian property to come in 2024, according to Moody's.
Aside from property, textiles have suffered due to the pandemic. This sector could present more of a problem in the coming year, as there is some $700m of debt coming due in 2022, in addition to the nearly $200m due in 2021, says Moody's. The ratings agency wrote in its 2021 outlook report for Indonesia that Caa1 rated Pan Brothers and Ba3 rated Sri Rejeki Isman (Sritex) are companies to watch as their debt maturities near.
Sritex, whose history dates back to 1966, has shifted its business this year to produce face masks and protective coverall suits. The company posted $907m in sales for the first nine months of 2020, a 1.3% year-on-year growth.
Allan Severino, chief financial officer at Sritex, says that because of the pandemic, his company was forced to revisit its funding requirements and postpone its capital expenditure plan, which was supposed to start in 2020. The company has a bank loan due in January 2022, and is proactively exercising its option to extend the loan maturity, an option that was built in when the deal was signed in January 2019.
"The volatility induced by the pandemic made us become more conservative in the way of approaching our overall business, including our funding," says Severino. "We need to be more disciplined in terms of choosing our funding source."
Some high yield issuers will continue to face challenges in accessing offshore bonds, but Henderson reckons sentiment is improving fast. He is hopeful that with the positive vaccine news headlines, investors will start to look more towards economic recovery. This, he says, could allow more high yield credits to return to the dollar market in 2021.
Other credits may look to the domestic bond market, loans or private placements, says Henderson.
"We're probably not going to see some of the most challenging credits access the market until we see a stronger bounce back," he says, “but recent secondary market performance has been very encouraging for the sector.”
Looking forward
The tone for 2021 for Indonesia appears to be one of cautious optimism.
Moody's predicts the country's GDP will grow 4.7% next year, falling short of pre-pandemic levels but still a sign of recovery.
In the near term, news around Covid-19 vaccines have created positive market sentiment globally.
Sritex
"In recent weeks, we have seen strong [sentiment] bounce back on the back of positive vaccine development and optimism toward strong growth recovery into 2021," says Severino. "We have seen our secondary perform admirably in recent weeks reflecting confidence among fixed income investors." Chan says Indonesia's recovery will be gradual, however. The virus situation is still not under control, he cautions, and it is not clear when Indonesia will be able to start vaccinations.
Attention will continue to remain on the ability of companies to refinance their upcoming maturities.
Some 28% of high yield bonds from Indonesia are set to mature by 2022, according to Moody's. The country's rated non-financial companies have $33bn in outstanding rated debt. High yield companies have $3.6bn of bonds coming due in 2021-2022, $2.1bn of which was printed by issuers rated B3 or below.
Grant is wary about the possibility of more defaults. "I don't think we have seen the full impact in the economy of shutdowns," he says. "At the corporate level there will be a lag."
Grant, who has a neutral position on Indonesia, reckons 2021 “will not look dissimilar to 2020”.
Fitch's Prayudi is a bit more upbeat about the opportunities available to issuers "We expect the funding market to become more friendly," he says. "Investors will still be relatively choosy, but it will not be as difficult of a year."
Chan says the resilience of Indonesian companies often boils down to their parent backers.
"We all know the horror stories of Indonesian companies defaulting during the Asia financial crisis and post-global financial crisis periods," he says. Investors were burned by Indonesia at those times, and some companies have failed to meet coupon payments in the years since as well.
The reputation of these companies affects how willing investors will be to put their faith in their ability to weather the pandemic, says Chan.
"It really comes down to that reputation and governance, and more broadly ESG [environmental, social and governance] preparedness," he says. "There are picks to be found, but you really have to navigate."