Indonesia, the largest economy in southeast Asia, has seen a surge in interest from foreign investors since the election of Widodo in July 2014. The interest is well supported by fundamentals, as reflected by a recent upgrade of the country’s rating outlook by Standard & Poor’s. The agency revised the country’s BB+ outlook to positive from stable on May 21, citing improved policy credibility.
Loan syndicate bankers were also hoping that Indonesian corporates would head offshore to take advantage of the positive sentiment, coupled with ample global liquidity and a downtrend in pricing. But they have had a disappointing year so far, losing volume to the bond market as well as having to navigate local factors that are keeping Indonesian borrowers from coming offshore.
The total volume of dollar denominated Indonesian loans stands at $4.5bn so far this year, a 32% drop year on year, according to data from Dealogic. The number of deals has fallen 43%, to just 12.
One factor hurting volumes is the downturn in commodity prices. Indonesia is among the top exporters of coal, but with demand from China cooling, coal-related businesses are suffering.
“Commodity prices have come down a lot,” said a senior banker who covers southeast Asia. “Some of the usual names in the coal mining industry are no longer raising debt and that has reduced volumes coming out of Indonesia,” he said.
Bond market
Indonesian state-backed issuers are also absent as they have been getting favourable terms in the bond market. This has been eating into syndicated loan volumes since the second half of last year.
“It’s the bond market, this has been going on since the end of last year,” said a Singapore-based banker who specialises in Indonesian syndications. “If you are a bank investor that focuses on high grade names then there is only so much to go around.”
Indonesian port operator Pelabuhan Indonesia II (Pelindo II), for example, reduced a $1bn syndicated loan in January, saying it was capping it at $550m. It then made a successful debut in the bond market in April.
The borrower did not specify in January the reason for the reduction in size, but bankers had speculated at the time that it was because it was considering a bond issue.
Sadly for bankers the dearth of activity is unlikely to be a short term blip as they expect the trend to continue until the Federal Reserve raises interest rates.
“We were expecting it [interest rate rise] may be in the September quarter but with US [economic] figures not as rosy as before, they might defer it further,” said a Hong Kong-based loans banker.
Another factor contributing to the lack of deals is the weakening of the Indonesia rupiah, said the senior banker. Though the loan market is very liquid, it will be more difficult for Indonesian borrowers without the natural hedge of US dollar revenues to tap it, as banks have burned their fingers on the back of currency fluctuations.
“There have been a number of [Indonesian] customers with little or no dollar revenues who have raised US dollar syndicated loans. IDR depreciation has hit them hard. There have been breaches of covenants and waiver requests for banks,” said the senior banker. “Banks are going to ask these guys a lot more questions.”
The rupiah has slipped about 6% against the dollar since the beginning of this year and nearly 15% compared with the rate on May 21, 2014.
That said, despite the relative lack of deals, the response to Indonesian borrowers this year has been varied. Weaker borrowers are still struggling to find demand.
While sovereign-backed Indonesia Eximbank’s loan was done and dusted within two months of syndication, a $500m dual tranche fundraising for Indonesia palm oil producer Royal Industries has been in syndication since February 27, with the deadline for commitments having been extended twice already. However, that loan is due to wind up soon, with four to six lenders coming in.