Rupiah drop to '98 low puts fund managers on alert: Asean Credit

[SINGAPORE] The last time the Indonesian rupiah was this weak in 1998, governments across Asia were seeking international bailouts to pay off foreign creditors. Now money managers are again asking whether borrowers are overextended.

Offshore corporate debt surged to a record US$128.8 billion in the third quarter of last year, about 22 per cent more than the nation's foreign currency reserves, Bank Indonesia data show. Companies weren't deterred by the rupiah's slump to its lowest level since the Asian financial crisis 17 years ago.

"I would be far more comfortable holding local currency- denominated debt than the US-denominated debt in Indonesia, and I'd rather hold sovereign debt than corporate," Goetz Eggelhoefer, managing partner of Asia discretionary investment at New York-based emerging market specialist TRG Management LP, said in a Jan. 14 e-mail. "Years of super-low US rates have encouraged corporates to issue US dollar paper, and the hunt for yield has encouraged global investors to buy it with too little regard for the underlying credit risk." With less than a fifth of Indonesian companies graded by Standard & Poor's hedging their foreign liabilities, investors are raising red flags. Developer PT Lippo Karawaci and tire maker PT Gajah Tunggal have amassed more than 95 percent of their debt in U.S. dollars, prompting the central bank to impose limits on firms borrowing abroad.

Potential Stress

The rupiah traded at 12,583 per dollar at 10:35 a.m. in Jakarta after closing at 12,739 on Jan. 7, the weakest level since 1998, as the Federal Reserve prepares to raise interest rates.

From this month, the regulator requires companies to protect at least 20 per cent of their foreign liabilities against rupiah fluctuations. Borrowers must also have foreign assets matching at least half what they owe offshore to limit any fallout from volatile markets.

"There is potential for stress and there are definitely pockets of corporates that took on too much leverage," said Leon Goldfeld, a Hong Kong-based investment director at Amundi, which manages 850 billion euros (US$989 billion) globally.

Lippo Karawaci, the nation's second-largest listed developer by market value, has 10.1 trillion rupiah (US$803 million) of dollar-denominated bonds outstanding, according to data compiled by Bloomberg. The company reported 181.8 billion rupiah of foreign exchange losses in the third quarter, its worst in at least a decade, the data show. It forecasts that December net income will drop 15 percent this year.

"We normally hedge the principal of our US dollar indebtedness in full through to maturity," Mark Wong, an executive director at Lippo Karawaci, said in a Jan. 14 e-mail. "Our decision to tap overseas markets depends on our funding needs and whether it makes sense to access specific sources of funds. This prudent approach is not expected to change." Investors in Gajah Tunggal should watch the rupiah's effect on income, Jakarta-based Joko Sogie, a research analyst at PT Danareksa Sekuritas, wrote in a Jan. 6 report.

The company's interest payments jumped 57 per cent to 593.2 billion rupiah in the first nine months of last year, its latest quarterly report shows, and UBS Group AG estimates that hedging foreign debt could add some 5 percent to those expenses. The yield on Gajah Tunggal's 2018 bonds has jumped 369 basis points since Oct 31, when its earnings were reported.

Interest costs for animal feed producer PT Japfa Comfeed Indonesia, which has $225 million of U.S. bonds, surged 50 per cent to 512.9 billion rupiah in the first three quarters, its last earnings report shows. The yield on the company's 2018 notes has leaped 339 basis points since the Nov 5 release.

More Prudence To help support an economy where growth slowed to 5.01 percent in the third quarter, President Joko Widodo needs to win support from global investors as he plans to build 25 dams in five years, 24 ports and six mass transport systems. The cost to protect the nation's sovereign debt using credit-default swaps rose 12.5 basis points this year to 169.5, after dropping 76 last year.

"The risk is different compared to 1998," Handy Yunianto, the head of fixed income research at PT Mandiri Sekuritas, a unit of Indonesia's biggest lender by assets, said by phone Jan. 13. "In terms of credit risk and how to manage the liquidity, there's much more prudence." Perfect Storm The central bank's new rules have already prompted companies to begin safe-guarding their offshore debt against currency swings, according to Jahanzeb Naseer, the head of Indonesian research at Credit Suisse Group AG. Local borrowers tend to hedge only their principal, and so the rupiah's drop will still affect their interest costs and bottom line, he said.

The regulator is especially concerned about foreign currency loans that companies have been taking onshore, which aren't captured by the regulator but could represent as much as 4 percent of private debt, Naseer said in a Jan. 9 interview. He predicts the currency could sink to 13,000.

"Real estate firms and commodity firms tend to be more at risk due to the leverage," Aaron Low, the Singapore-based principal of emerging-market fund Lumen Advisors LLC, said in an e-mail yesterday. "The current headwinds could gather momentum in a perfect storm of slower growth, stronger dollar, and higher rates."

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