The Indonesian corporate bond market is experiencing slower issuance activity so far this year compared to 2018 due to the competition from alternative funding avenues. The multi-finance companies, which are frequent issuers in the bond market, are opting for US dollar syndicated loans in some of their fundraising since they offer competitive pricing and the swap market for the US dollar to rupiah is quite cheap.
From January to mid-September, a senior banker estimates that total issuance of rupiah-denominated bonds/sukuk amounted to around 80.4 trillion rupiah (US$5.68 billion), though he expects the total volume for the year to recover to between 100 trillion rupiah and 105 trillion rupiah as activity picks up in the fourth quarter. In 2018, the total issuance volume was 107.5 trillion rupiah, below the record high in 2017 of 159.9 trillion rupiah.
Indeed, Indonesia is one of the countries where companies prefer bank loans to bond issuances when funding is required, according to a study by Credit Guarantee and Investment Facility (CGIF), which was set up to develop and strengthen local currency and regional bond markets in the Asean+3 region.
CGIF was established by the 10 members of Asean, together with China, Japan, and South Korea (all three along with Asean form Asean+3) and the Asian Development Bank.
Aside from corporate bonds, other debt instruments available to Indonesian issuers and borrowers include medium-term notes (MTNs), negotiable certificates of deposit, and promissory notes. In addition, an alternative to a public bond offering is to issue an MTN, which provides an avenue for issuers and borrowers with lower credit ratings to access the domestic debt market.
Indonesia’s corporate bond market is one of the smallest in the Asean+3 countries, says the CGIF study, with a value of 441 trillion rupiah. The average size of rupiah-denominated bonds outstanding as of December 2018 was equivalent to US$36.9 million – also the smallest among six Asean countries that also include Malaysia, the Philippines, Singapore, Thailand and Vietnam.
In terms of tenors, CGIF notes that 78% of Indonesia’s corporate bonds were issued with maturities of five years or less. The high concentration of five-year or shorter maturities is attributed to financial companies, most of which operate auto finance businesses. They are the second-biggest issuer group next to state-owned enterprises (SOEs) in the domestic bond market and rarely issue bonds longer than five years, which is the average maturity of their assets, which are auto loans.
In addition, the current preference of local investors regarding corporate bonds is for short-term bonds. The market for three-year to five-year corporate bonds is now building up, says CGIF, especially from pension funds and insurance companies. This trend is considered a positive development to encourage longer term issuances in the future.
Only 3% of the corporate bonds were issued with maturities longer than 10 years. “Because more weight was given on shorter tenors and less on longer tenors, the value-weighted average maturity of corporate bonds in Indonesia was 4.6 years – the shortest among the six Asean countries,” says the CGIF study. In terms of type of coupon, fixed coupon bonds are dominant among the six Asean countries, with Indonesia having the highest ratio.
Maturity type bonds can be classified into straight bonds, callable bonds, sinkable bonds, convertible bonds and others. Straight bonds are the plain vanilla structure, which pays principal only at maturity without any option for early redemption or extension.
Straight bonds are dominant in Indonesia. Out of the 691 corporate bonds available from the Indonesia Stock Exchange (IDX) as of the end of 2018, only three bonds were non-straight bonds. SOEs, finance companies and banks were the biggest issuers of straight bonds in 2018.
In 2018, about 93% of corporate bonds were held by local investors, and only 7% by foreign investors. Major local investor groups consist of mutual funds, which account for 26%, followed by pension funds which make up 21%, financial institutions 20%, insurance companies 18%, individual investors 4%, and other investors 4%.
CGIF reckons the small share of foreign investors might be due to the following reasons: (1) legal ambiguity for foreign investors to claim their rights in the event of default; (2) a high withholding tax rate of 20% for foreign investors; and (3) the lack of trading in the secondary market.
A contributing factor for mutual funds’ bigger share is the favourable tax rates on interest gained from investments, which is 5% - significantly lower compared to the 15% tax rate for pension funds and insurance companies. This incentive was supposed to end in 2017, according to CGIF, but the government decided to extend this benefit until 2020, after which the 5% tax rate will be increased to 10%.
Investors, according to the CGIF study, prefer SOE-issued bonds because they believe they are safer than private companies due to the implicit guarantee from the government that an SOE can get. Investors often comment that an A rating is the minimum credit rating investible even if OJK allows them to invest in paper rated as low as BBB.
In terms of issuers, banks comprised the biggest group as they accounted for 37% of the total outstanding bonds as of December 2018. This was followed by finance companies with 22%, while companies in infrastructure, utilities and transportation accounted for 18% of the total outstanding bonds.
In December 2017, Indonesia introduced a new asset class in the global debt market with the pricing of the first-ever Komodo bonds for state-controlled toll road operator Jasa Marga amounting to four trillion rupiah.
This was followed in January 2018 by a bond issue for state-controlled construction company Wijaya Karya amounting to 5.4 trillion rupiah. Komodo bonds are rupiah-denominated bonds sold in the international market, with payments of principal and interest to be made in US dollars.
Last October, the International Finance Corporation printed the first Komodo green bonds amounting to two trillion rupiah.
Both the Jasa Marga and Wijaya Karya bonds were listed on the London Stock Exchange and Singapore Stock Exchange in order to attract foreign investors. However, further issuances of the bonds were curtailed by the subsequent depreciation of the rupiah.
CGIF issued its first bond guarantee in Indonesia in early December 2013 for PT BCA Finance for 300 billion rupiah.
CGIF also enabled PT Profesional Telekomunikasi Indonesia (Protelindo), which builds, operates and leases telecommunication towers for wireless operators, to access the Singapore dollar bond market for the first time with a 100% guarantee for its S$180 million (US$130.95 million) bond issuance in November 2014.