Indonesian Borrowers Get Reprieve as Junk Bond Market Wobbles

Indonesian borrowers, some with the weakest credit ratings in Asia, are getting some respite from investors just as the high yield bond market begins to sputter.

PT Gajah Tunggal, Indonesia’s biggest tire maker, sold $250 million of five-year notes at 8.375 percent on Thursday, according to people familiar with the matter. That complemented a $250 million syndicated loan facility needed to redeem $500 million of bonds due in February. Oil explorer PT Medco Energi Internasional has also met investors about a dollar bond offering.

The sale lifted total issuance by Indonesia’s junk-rated companies to $3.25 billion so far this year from $610 million a year earlier, Bloomberg-compiled data show, aided by a sovereign upgrade and commodity market outlook. While such offerings are growing at a record pace in Asia, concerns about monetary policy tightening, valuations and debt binges have elicited hit-and- miss results as shipper PT Soechi Lines and coal miner Geo Energy Resources Ltd. stumbled.

“There have been successful deals from junk-rated issuers and the stabilization in the commodity sector certainly helped,” said Raymond Chia, head of credit research for Asia ex-Japan at Schroder Investment Management in Singapore. “Certain issuers that failed to sell bonds were either in risky sectors, have little track record, or aggressive pricing expectations. One thing to caution about high-yield issuers, in general, is that bondholder protection is getting weaker and weaker.”

Read: Asia Junk Bond Buyers Accept Weaker Debt Protection

The average spread on Asia’s high yield corporate debt has risen 60 basis points to 484 from a 10-year low on March 3, according to JPMorgan Asia Credit Index. The risk premium on Indonesian corporate debt of all grades has been steady at about 300 basis points over the past two months, after falling from 474 in 2016 and 747 in 2015, another index shows.

Low Ratings

Gajah Tunggal is among the weakest credits to get new money from investors this year after coal producer PT Indika Energy raised $265 million in April. Both companies were ranked Caa1 by Moody’s Investors Service, or seven steps below investment grade at the time of their offerings.

Easing refinancing pressures are brightening Gajah Tunggal’s chances for an upgrade. Moody’s and S&P Global Ratings have placed their ratings on watch for possible improvement.

So far, not all have had happy endings. Shipping group Soechi Lines postponed a bond sale in June, citing uncertain market conditions, while coal miner Geo Energy scrapped its dollar-bond offering last month for the same reason.

“Interestingly, Indonesian credits are offering higher yields than, say, recent Indian issues,” said Charles Macgregor, head of emerging markets in Singapore at Lucror Analytics Pte.

“Seemingly, investors have not forgotten that Indonesian companies have been responsible for the worst losses in the Asian high yield market.”

Bloomberg News
August 4, 2017, 02:45:13 GMT
Reporting by David Yong and Lianting Tu, with assistance from Carrie Hong; Editing by Neha D'silva, Chan Tien Hin and Finbarr Flynn