Indonesia's debt issuers are spoiled for choice in the international markets. Many of these companies have tapped the dollar bond market already. There are also opportunities in euros, offshore renminbi, Singapore dollars, and other Asian local currency markets.
But in the domestic bond market, they are still coming up against a reasonably limited investor base, as well as strong competition from bank lenders. They have been able to pick-and-choose the best markets for their funding needs so far, but the country's immense infrastructure funding needs means that all investors and lenders should be asked to play a role in the future.
Asiamoney sat down with a panel of leading market participants in Jakarta to discuss exactly how issuers are going to help fund the anticipated boom in infrastructure spending in the country, and what hurdles they need to overcome before the eye-popping opportunities in the market can be realised.
Panelists:
Ahyanizzaman, finance director, Semen Indonesia Persero
Adam Gifari, president director, Profesional Telekomunikasi Indonesia (Protelindo)
Ari Soerono, chief financial officer, Indonesia Infrastructure Finance
Nor Masliza Sulaiman, global head, capital markets, CIMB
Brian Grieser, senior analyst, corporate finance group, Moody’s Investors Service
Kiyoshi Nishimura, chief executive officer, Credit Guarantee Investment Facility (CGIF)
Moderator: Matthew Thomas, contributing editor, Asiamoney
Asiamoney (AM): It would be helpful to start this discussion by getting a sense of the rate environment, and the credit environment, before we go into the details of the debt market here. What should investors and issuers be looking out for over the next year or so?
Nor Masliza Sulaiman, CIMB: It is no secret that rates are going to go up eventually. You can see that by the front-loading of issuers in the rupiah market. Around Rp46tr is expected to be issued in the first six months of this year; that is the same number we saw throughout all of last year. Issuers are trying to tap the market sooner rather than later, and we expect year-end volumes will end up being around Rp60tr or Rp65tr. Issuers are trying to capture the best rates they can while the interest rate backdrop is still accommodative.
Most market participants are anticipating a potential US rate hike in September, but you need to factor in what is happening in Greece at the moment, and of course the performance of the US economy. The signals are actually quite mixed. You can also infer from the Fed Funds Futures market, where the general expectation is that rates will go up. A similiar market expectation is present with respect to the rupiah bond market: rates will increase and it’s simply a question of time.
We see the same situation in other markets in the ASEAN region. Issuers are trying to front-load because they anticipate global and local rates will increase. ASEAN issuers are also becoming a lot more adventurous, looking to overseas markets like Singapore dollars, Thai baht and Malaysian ringgit other than the traditional USD funding. They are increasingly using synthetic funding solutions to tap the most optimal funding currency coupled with cross currency swaps to achieve the most cost efficient financing and avoid currency mismatches.
Ari Soerono, Indonesia Infrastructure Finance: We need to understand the best markets where investors will accept our target rates and give us the best cost of funding. At the moment, when we look at the Indonesian rupiah market, it looks a little too expensive. I agree with what Liza said. We can be more adventurous in this market. We have looked into issuing an offshore renminbi, or CNH, bond and swapping the proceeds of that deal into US dollars or Indonesian rupiah. But unfortunately, the swap market is not working so well at the moment.
AM: What about the credit outlook? How strong is the credit environment right now for corporations operating in Indonesia?
Brian Grieser, Moody's: The increasing rate environment is obviously going to have a negative impact on the credit sector. We are stable right now for Indonesia. When you look at GDP growth of 5% in 2015, low unemployment and the emerging market, there are clear factors that will support the corporate credits that we cover.
We tend to focus on infrastructure companies, or companies that have exposure to that sector, including construction and shipping companies. We expect these companies to be relatively strong for 2015. The downside is that there are a significant amount of commodity exports coming from Indonesia and those companies will be under pressure. We have to balance these two factors, so all in all we expect the corporate sector to be stable for 2015.
AM: What are the most attractive offshore markets for Indonesian borrowers at the moment?
Ahyanizzaman, Semen Indonesia: After we were upgraded [by Moody's from Ba1 to Baa last year], we got a lot of attention. Everybody came to my office with an attractive proposal. We also managed to refinance debt at one of our subsidiaries without a corporate guarantee. We think we have a good chance to get the loans we need for our company. We do not really need a lot of financing right now, but next year we will start to see our funding rise. The upgrade is certainly going to help us explore more options.
We are still studying what kind of funding matches best with our capital expenditure. When we look at greenfield projects, the best place to fund is the bank loan market. But when we consider refinancing these loans, then we start to look at the bond market. We have gotten funding from export credit agencies last year, but the prices have gone up now. We secured a loan in rupiah at 6% last year, but that same loan would cost us 11% now.
International investors are still waiting for us to issue a bond. We have done non-deal roadshows, and investors tell us they are hopeful we will come to the offshore market. That is something we are certainly considering, but it will likely happen next year.
Adam Gifari, Protelindo: We have looked at various options, and we will certainly revisit arbitrage opportunities when we are ready to issue offshore. But at the moment, we are waiting for infrastructure spending to increase. We provide infrastructure for telecoms companies, and those companies provide telecoms to new areas, in houses, hospitals, and so on. But this chain is dependent on greater infrastructure spending by the government. We are at the end of this process of infrastructure spending growth.
We are working on slowly fixing our capital structure. It used to be based entirely on floating rates, but we are moving towards fixed rates as much as possible. We turn to the funding markets every 18-24 months, and we expect to fund more in the next few years. But right now is a very interesting moment for corporations to issue. If the US hikes rates, there is only going to be one direction for Indonesian interest rates to go.
AM: Infrastructure growth is clearly a hot topic in Indonesia. It is something that comes up time and time again in meetings in Jakarta, as well as in discussions with foreign investors and corporations considering the country. How large are the infrastructure needs in the country at the moment — and what is the best way to address them?
Soerono, Indonesia Infrastructure Finance: The government estimates that the country needs around $433bn in the next five years to finance its infrastructure needs. The central and regional governments can only finance around 40% of that, so around $217bn has to be financed by state-owned enterprises, as well as private sector investors. The banking sector alone would not be able to bear that burden. The capital market needs to be brought in to help.
The bond market is quite attractive for infrastructure companies because pension funds and life insurance companies need long-dated assets, whereas infrastructure companies need long-dated liabilities. That is a good match, but the problem is to get there.
We are trying to help one of our clients to issue a project bond. We are looking at guarantees from institutions like the CGIF and the Indonesia Infrastructure Guarantee Fund, so that the risks can be reduced and the rating agencies can give a good rating to encourage investors.
Another area where we are trying to help support the growth of funding from the bond market is to securitise some of our assets. These are projects that are already operating, and that have existing cash flows. This is not going to happen now; we want to wait a few years to season our assets. But this is definitely another area where we see growth.
We predict that 65% of our portfolio is going to be denominated in US dollars, because that is the operating currency for a lot of the infrastructure companies. Electricity companies, for example, represent about 30% of the projected infrastructure spend over the next five years. There is a big opportunity for foreign investors to help finance infrastructure projects in this market.
AM: What is the best way for CGIF to help fund infrastructure projects in this market, as Pak Ari mentioned?
Kiyoshi Nishimura, CGIF: One of the major reasons our contributing governments established CGIF was the recognition that ASEAN countries need highly-developed capital markets to finance local investment needs, especially in the infrastructure sector. At the moment, you do not really see project bonds anywhere outside of Malaysia. We are working on several concrete cases, including deals in the Philippines and Thailand.
There are many ways to design project bonds, but when you look at the reasons why Malaysia has been so successful in this area a key factor is the important role of institutional investors in that market. Our role is to give comfort to institutional investors in other markets, because they may not have invested in project finance bonds before. They need to become more familiar with these types of bonds before they can help drive the market forward.
The structure that we are talking about in the Philippines, and most likely in Thailand, is a partial guarantee. There will be one tranche guaranteed by an institution like us, and one tranche that is not guaranteed. That allows bond investors to decide what sort of exposure they want to get. That is going to help them analyse both guaranteed and unguaranteed risk, and give them incentive to put the processes in place to buy these bonds in the future.
Gifari, Protelindo: It has been a pleasure working with CGIF [on Protelindo's CGIF-guaranteed S$180m 10 year bond in November 2014]. They are highly professional. They work very hard. They work weekends. Even our lawyers were surprised at how much they kept up with the pace. It was very effective for us to go out on the world stage with a guarantee by CGIF that helped leapfrog our rating to single-A territory.
There has been a lot of discussion among policy makers about financial inclusion, but it is institutions like CGIF that are really making that happen. There are a lot of corporates that cannot tap the bond investor base simply because of rating hurdles. This is a very helpful development.
Nishimura, CGIF: I'm sure that Protelindo could have issued a bond without CGIF's help. But the benefit of guarantees is that they open up issuers to even those investors that have a very high rating hurdle for what they can add to their portfolio.
Indonesian companies are the most active borrowers in the ASEAN region when it comes to tapping offshore investors, but still a lot of these borrowers face the rating hurdle. The sovereign rating is borderline investment grade which constrains the international rating of a lot of corporations. That makes it very difficult to tap institutional investors, not just in Indonesia but in a lot of markets in the ASEAN region.
AM: Is financing the main hurdle that needs to be cleared right now to increase infrastructure spending in this country, or are there other issues that still need to be overcome?
Grieser, Moody's: We think that the infrastructure market is a great investment at this point in time. The projects tend to get very good ratings because of the long-term nature and the predictability of cash flows that are associated with them. The funding is the main question mark, including how much of a role the capital markets play and what kind of help the government can give.
Sulaiman, CIMB: I'd like to share some background on why private sector project funding is so successful in Malaysia. Private sector companies are typically awarded long-term concessions and with that you have long-term cash flows. Given the sanctity of those concessions/contracts, the cash flows can be easily modeled by investors and they can assess the financial viability of these projects. That makes it easier for investors to invest in project finance debt for as long as 20 to 25 years.
AM: How does the pricing available in the bond market at the moment compare to what infrastructure companies can get from bank lenders?
Gifari, Protelindo: We get around two-thirds of our capital from bank lenders at the moment, with the rest coming from the bond market. One of the reasons is that interest rates in Indonesia are stubbornly high. That is one of the reasons that we tread very carefully when it comes to long-dated financing. The longest duration debt we have in rupiah at the moment is around three years, and at that end of the curve, bank lenders offer the best pricing.
The next step for us is raising five or seven year debt. This is something I'm looking at closely now. I've been quite surprised to see where recent Indonesian bonds have priced, but there are not too many private sector companies like us. If we were to issue a 10 year bond right now, the yield would be easily around 11%.
AM: How do you see your debt issuance evolving over the next few years?
Ahyanizzaman, Semen Indonesia: We still have a big debt capacity right now: our debt-to-Ebitda is only 1.5x and we can stay at that level without impacting our rating, according to Moody's. We have around Rp8tr of Ebitda, which gives us around Rp12tr of debt capacity in the market. We can build a new plant for around Rp4tr, so we can build several new plants with the debt capacity available to us.
There is still a lot of room for us to expand, which is a must in this country. We still have opportunity to grow. There are a lot of young businesses that still need cement. Our consumption of cement per capita is only 200kg, whereas in Vietnam it is double. We hope that Moody's can give us further room with regards to debt-to-Ebitda to expand our business in the future!
Grieser, Moody's: Semen Indonesia is the first high yield issuer in Indonesia to be upgraded to investment grade, and a big part of the reason is the conservative way in which they manage their business growth. That has been consistent for 10 years. The company manages its margins at very high levels, and maintains a leverage profile that is relatively small. Semen Indonesia is currently positioned very well to benefit from infrastructure growth in the country.
AM: Bank Indonesia has changed the rules on foreign exchange exposure for local corporations, forcing them to hedge at least 20% of their net foreign currency risk. But perhaps more importantly, the central bank has told companies rated below BB that they will not be allowed to issue debt in the offshore dollar market. Is this a sensible move?
Sulaiman, CIMB: It makes sense and it’s prudent for the authorities to ensure that Indonesian corporates are managing their forex exposure diligently. The guidelines state that companies do need to have a minimum rating and they also allow scope for natural hedging. Both are good to heighten financial discipline and transparency. Corporates with a natural source of foreign currency revenue and assets will find it easier to procure their foreign currency liabilities because of the natural hedge.
At the moment, around 40% to 50% of Indonesian debt is raised offshore. It is prudent in that context to take a careful look at how these companies are raising money, and making sure they are not exposing themselves to undue risks.
Nishimura, CGIF: We certainly want to support Indonesian companies going to the offshore markets, but I must say that we support this move. In fact, when we provide support to companies going across borders, our requirements are much stricter than OJK's. We ask issuers to be fully hedged, through either natural hedging or financial hedging. The volatility in the international markets is a real risk factor for issuers, and they really need to be aware of the risk they take on board when they turn overseas for funding and leave their exposure unhedged.
My understanding is that the intention here is to require more companies to be rated, actually, rather than to discourage companies from going into the offshore markets.
Sulaiman, CIMB: It is worth pointing out that this is a good move for local investors as well. A lot of Indonesian issuers are tapping both the offshore and onshore markets concurrently. High volatility in forex exposure can hurt issuers' financials, and impact their credit profiles as a result. This is a good way to make sure local investors are not indirectly exposed to open forex volatility.
Grieser, Moody's: Foreign currency borrowing is very significant in this country. We recently did a study on all the Indonesian companies that have dollar bonds outstanding, based only on those that we rate, of course. A large portion of the US dollar issuers are commodities companies that have a significant amount of US dollar sales.
Those who use financial hedges at this point are typically property developers that mainly have rupiah revenues. We have not seen a lot of issuers putting in place financial hedging, partly because they don't have a need for that at the moment. But they are making sure that they are in a position, if the Indonesian rupiah falls, that they can put those hedges in place.
AM: Is it too optimistic at this point to hope that ASEAN issuers can increasingly start to meet their infrastructure funding needs by turning to other bond markets within the region, or by encouraging foreign investors to come in to the local market?
Soerono, Indonesia Infrastructure Finance: My feeling is that there is enough interest from ASEAN investors to invest in Indonesian infrastructure, so there is a chance for this source of demand to grow. We are certainly looking at doing that, and I know a couple of our clients are looking at it, too. But it all depends on the volatility of the swap market. It is still a long way to go, but perhaps in one or two years there will be big demand for people to explore this option.
Sulaiman, CIMB: In terms of infrastructure funding, it is important to have a base of pre-existing onshore liquidity to get offshore investors to be more comfortable with the local project risks. Offshore investors will draw comfort from local investors’ familiarity with the local project sponsors, projects, contracts, and the local regulatory framework which governs the local projects. This will encourage foreign investor participation in cross border infrastructure financing.