Citing Moody's Asia High-Yield Interest Chartbook report, issuance among high-yield nonfinancial firms in South and Southeast Asia (S&SEA) only reached US$90 million in the first half of the year, the lowest in years.

Over the past five years, for comparison, bond issuance always hit between $2 billion and $4 billion. The report also states that 21 of 39 S&SEA companies rated by Moody's are based in Indonesia. 

The sluggish corporate bond issuance in Indonesia was on par with similar trends across Asia, partly driven by the absence of Chinese firms’ issuance.

As a result, Moody’s noted, companies had begun to rely on domestic banks and capital markets to meet their refinancing needs. This trend also persisted in spite of the ability to maintain stable debt ratings among most S&SEA firms.

“The sharp drop in Asian high-yield issuance reflects a flight to quality driven by the uncertain macroeconomic environment,” Annalisa DiChiara, senior vice president at Moody's said in a statement on July 26.

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The bond issuance drop happened amid increasing global uncertainty, stemming from high inflation induced by the war in Ukraine and supply disruptions that struck many countries.

It was then followed by aggressive monetary tightening among advanced economies that drove yields to a record high in the process, raising costs of financing for firms in need to make a bond issuance or simply refinance their debt.

Felita, senior analyst at Fitch Ratings Indonesia told The Jakarta Post on July 29 that the impact of weakening global growth and geopolitical tension had been more pronounced in the offshore market, whereas the domestic issuance was relatively unaffected.

“Onshore corporate note net issuance continued to be positive in the first half of 2022, despite global economic challenges,” Felita explained.

The driving factors were recovering business activities that increased funding needs for working capital and investment, gradually improved domestic investor sentiment as well as interest rates that remained at low levels.

Felita added the ongoing economic activities also supported issuers’ repayment and refinancing capabilities. 

The overall default rate by principal for Indonesian domestic corporate notes fell to 0.6 percent in the first quarter this year from 1 percent in 2021 and 4 percent in 2020, Fitch data show.

However, she said, the consumer-related sectors would continue facing raw material pressure this year, adding further that a prolonged increase in commodity price input might still put pressure on some companies’ rating headroom.

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On the other hand, research associate director at Pilarmas Investindo, Maximilianus Nicodemus, said 2022 would remain a challenging year to issue corporate domestic bonds, arguing that Bank Indonesia’s dovish stance might soon be over. 

At the same time, the United States Federal Reserve (Fed) planned a hike for the federal funds rate (FFR), which is expected to rise to 3.5 percent this year after recently reaching 2.5 percent during the July meeting.

Moreover, yields of corporate bonds are often set above the already-high yield on government bonds, which continued rising amid the Fed’s interest rate hike. Yields for 10-year local currency government bonds had risen to 7.37 percent as of July 25, from 6.36 percent on Jan. 3 this year.

“So far, we saw there has been an increase in issuance from last year, but it was not significant. We could see the current condition was not supportive enough for firms to issue corporate bonds,” Nicodemus told the Post on Friday.

Both private and state-owned enterprises (SOEs) were expected to experience the same pressure when issuing domestic corporate notes.

Domestic corporate bond issuance was expected to reach up to Rp 125 trillion ($8.41 billion) this year, increasing 16 percent from last year’s Rp 107.5 trillion mark. However, that projection was lower than the 20 percent increase achieved in 2020. 

This year, Nicodemus predicted that outside the banking and multi-finance industries, there would be a significant number of supplies from the mining, telecommunication, plantation and property sectors.

Sucor Sekuritas equity analyst Paulus Jimmy said on July 25 that alternatively, firms could consider raising funds in the domestic equity market instead, arguing it could be more cost-effective compared with debt raising amid a high-interest rate environment.