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[SINGAPORE] The double whammy of a slumping currency and rising hedging costs is denting the appeal of overseas financings for Indonesian borrowers.
Telecom operator Indosat turned to the local rupiah market on Thursday to refinance US dollar debt. Its move comes as Indonesia is pressuring local companies to rein in their foreign currency liabilities, and bankers expect more local companies to follow suit. "It has always been cheaper to fund in rupiah than in the offshore bond market," said a local head of debt capital markets. "With the government trying to put a halt to more companies seeking offshore debt, local companies will have to get more creative and start tapping the local market."
Indosat, which earns all its revenues in Indonesian rupiah, has priced a Rp3.1 trillion (S$317 millon) multi-tranche bond that will go towards the repayment of a US$650 million bond due 2020. The dollar bond has a call option on July 29 this year, and the company's top management plans to exercise it. "We are now focused on reducing the foreign exchange mismatch so we will not be so vulnerable to currency movements," said an Indosat spokesman. "Our operating levels are fine, but it's our bottom line that is being affected by currency risks."
The US$650 million bond makes up the biggest chunk of Indosat's US dollar debt. At US$850 million, the company's dollar liabilities account for a hefty 46 per cent of its total debt, and were a key factor behind foreign exchange losses in the first quarter of this year. Indosat last week reported a net forex loss of Rp717.6 billion for the first three months this year, reversing a gain of Rp805.7 billion in the first quarter of last year.
The rupiah has depreciated some 6 per cent this year against the greenback, and is trading around the lowest levels since the 1997/1998 Asian financial crisis. On May 28, the rupiah stood at 13,220 per dollar and analysts expect the rupiah to hover there or fall further to 13,500 for the rest of the year.
Alongside the rupiah slump, higher hedging costs are also forcing Indonesian borrowers to stay close to home.
Bank Indonesia is pushing companies like Indosat to hedge foreign debt to avoid a repeat of the Asian financial crisis, where a currency slump caught heavily indebted Indonesian borrowers on the wrong foot.
Such a scenario is a growing threat. According to the central bank, external debt in the first quarter this year increased by 7.6 per cent year-on-year to US$298.1 billion, including US$165.3 billion from private-sector borrowers. Less than 30 per cent of new foreign-currency corporate debt was hedged by April, according to BI.
Under the hedging laws, non-bank borrowers have to hedge at least 20 per cent of short-term net foreign liabilities in 2015 and 25 per cent in 2016. In addition, issuers have to maintain a minimum forex liquidity ratio to mitigate liquidity risk and a minimum credit rating of BB- before raising funds in the US dollar markets.
The weakening rupiah has raised the premium of 12-month forward rates to spot rates used in hedging. Reuters noted that the premium has risen to more than Rp1,000 since April. "We are not worried about the hedging rules as we are well above their requirements," said the Indosat spokesman. But he acknowledged that the cost of hedging has risen because of the rupiah's volatility. Hedging US dollar exposure for a year now costs about 4 per cent of the hedged amount, higher than around 2 per cent-3 per cent a year ago.
Not all Indonesian borrowers with US debt need - or are able - to refinance US dollar debt with local currency debt. Companies with overseas revenues, such as tyre maker Gajah Tunggal, are likely to retain their US dollar debt, while property companies are barred from raising local funds to fund land acquisitions.
The international market also offers far bigger deal sizes than the rupiah bond market can support, and the low interest rates in US dollars may still appeal to some fast-growing borrowers - even after the hedging costs. "The depreciation of rupiah has impacted natural rupiah earners who borrow in foreign currencies," said one Singapore-based debt banker. "Indonesian issuers are very savvy and sophisticated and they will weigh the cost competitiveness between domestic and offshore markets, and between bonds and bank loans."