State-owned construction company PT Pembangunan Perumahan (PP) is set to issue perpetual medium-term notes (MTN) in December to strengthen its balance sheet.

PP president director Tumiyana said on Friday that the company allocated Rp 8 trillion (US$592.37 million) for the MTN and that although the amount for the first tranche was not yet fixed, it would be between Rp 1 trillion and Rp 1.5 trillion.

“We will analyze our financing needs in December. It will be around Rp 1 trillion to Rp 1.5 trillion,” he said at the Indonesia Stock Exchange (IDX) during the listing ceremony of the company’s subsidiary PT PP Presisi.

The president director of state-owned private equity company PT Danareksa Capital, Uriep Budhi Prasetyo, who also acts as a technical advisor to the company, said that the perpetual MTN had unlimited tenor, so the issuer would not be required to pay the debt principal within a limited period.

Because of its special nature, the perpetual debt instrument was a hybrid, recorded as debt for the investor but as equity for the issuer.

“This instrument was suitable for state-owned companies working on infrastructure projects. They needed a lot of funding but they were constrained by capital leverage and bureaucracy,” he said.

The hybrid instruments, he continued, had a lower rating compared to the ordinary debt instruments and that with the lower rating, the instrument must provide a higher coupon.

“Usually, the rating of the perpetual instrument was one notch lower than the bond rating,” Uriep said.

Local rating agency PT Pemeringkat Efek Indonesia (Pefindo) issued A- rating for PP’s perpetual MTN last week, lower by one notch than its A+ bond rating.

Uriep said that the instrument was a relatively new product as the Financial Services Authority (OJK) was currently processing the regulation. However, in advanced financial markets such as in Singapore and Europe, this product was already common, he said.

“We will offer the perpetual MTN to investors who are literate about the instrument, such as insurance companies, pension funds and high-net-worth individual (HNWI). For the sweetener, we will embed features such as a buyback option after three years or raise the coupon if payment failure occurs,” he said.

Tumiyana said that the perpetual MTN was part of corporate balance sheet strengthening efforts, despite PP’s strong financial position.

In the third quarter, the debt-to-equity ratio (DER) was 183.03 percent, lower than other construction state-owned enterprises, such as 185.13 percent in PT Wijaya Karya, 299.45 percent in PT Waskita Karya and 340.18 percent in PT Adhi Karya.

“Other than the MTN, our balance sheet strengthening strategy will be done through the initial public offering [IPO] of our subsidiaries. PP Presisi has done it today and we are still preparing PT PP Energi for the next round,” he said.

Shares of PP Presisi, a civil engineering provider, were listed on the IDX on Friday. The company obtained Rp 1 trillion by selling 23 percent of its shares to the public.

PP Presisi president director Iswanto Amperawan said that 70 percent of the IPO proceeds worth Rp 700 billion would be used for 2018 capital expenditure (capex), such as for purchasing new equipment and land, while the remaining 30 percent, or Rp 300 billion, would be kept for corporate equity.

“The company will continuously make investments in heavy equipment and human resources development to support infrastructure projects in Indonesia,” he said.

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