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Local companies turn to global bonds to reduce funding costs
Indonesian companies are turning to global bonds to raise funds in order to reduce funding costs amid a downtrend in interest rates in the world’s financial markets
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span>Indonesian companies are turning to global bonds to raise funds in order to reduce funding costs amid a downtrend in interest rates in the world’s financial markets.
At least seven companies have already issued their global bonds since early January to take advantage of cheaper funds overseas.
Property developer Lippo Karawaci and oil and gas company Medco Energi International were among the latest issuers of the global bonds.
Lippo Karawci issued on Jan. 15 US dollar denominated bonds with a tenure of five years and a coupon rate of 8.13 percent a year and raised about US$325 million. The bonds were oversubscribed four and a half times, the
company said.
Meanwhile, Medco Energi International said it had just issued global bonds with a tenure of seven years and a coupon rate of 6.37 percent. Medco raised $650 million from the issuance of the global bonds, which were listed on the Singapore Stock Exchange on Jan. 16.
The four other issuers are Bumi Serpong Damai (BSD), Bank Tabungan Negara (BTN), Bayan Resources and Tower Bersama Infrastructure.
Anugerah Sekuritas Indonesia fixed income analyst Ramdhan Ario Maruto said the downward trend in interest rates had prompted companies around the world to tap into global bonds to raise funds for business expansions.
He believes that in addition to the six companies, more local companies will be issuing global bonds because funding costs are decreasing due the decline in interest rates.
“Companies with US dollar expenses will issue more global bonds this year, not only because of the lower coupon rates, but also because of the bigger bonds they could get,” Ramdhan told The Jakarta Post over the phone.
Although the US Federal Reserve maintained its interest rates at 1.5 percent to 1.75 percent during its first Federal Open Market Committee (FOMC) on Jan. 28-29, analysts expect the downward trend in the interest rates to continue this year.
In line with the trend, Bank Indonesia (BI) is expected to further cut its benchmark seven-day reverse repo rate to 5 percent as inflation is projected to remain under control at around the 3 percent level, Fitch Ratings Indonesia president director Indra Kampono said on Friday.
He said the recent strengthening of the rupiah exchange rate should also provide BI more room to cut its interest rate even further this year.
“BI should have room to cut its policy rate by at least another 25 basis points this year,” he told the Post in an e-mailed response.
Indra said that although their returns were still lower than those offered by rupiah bonds, global bonds remained attractive to investors, as many treasury bonds offered by other counties have given negative returns.
“At present, around $12 trillion in global government bonds offers negative returns. Investors may still prefer buying Indonesia’s global bonds, which still offer higher returns.”
Indra predicts that future issuers of global bonds from Indonesia will be those involved in construction as they need more funds to take part in the government’s infrastructure projects, such as the development of infrastructure facilities and office buildings for the country’s new capital city in East Kalimantan.
“We also expect demand for refinancing from sectors such as property, energy, banks and multifinance to increase as firms seek financing in the bond market this year,” Indra said.
Despite the major financing opportunities companies currently face, investment management firm Bahana TCW Investment economist Budi Hikmat said debtors should not ignore the potential risks of issuing foreign currency debts.
“They have to pay attention to the currency risks, interest rate risks and income risks,” he said.
Although the rupiah exchange rate against the US dollar has been more stable lately, Budi warned that currency risks remain as uncertainty in the global economy continues.
He added interest risks might not be debtors’ biggest concern, but he advised debtors to ensure a secure income stream as it relates closely to their business sustainability and ability to repay their debts in the future.
In light of the recent default case of textile manufacturer PT Delta Merlin Dunia Textile on its global bonds, Ramdhan of Anugerah Sekuritas suggest that companies should always able to maintain investors’ trust by maintaining transparency.
