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Widodo port revival tested as Indonesia shipper ends bond hiatus

An Indonesian shipper is offering the first dollar bond from the country's industry in more than five years. President Joko Widodo must be hoping it succeeds.

[SINGAPORE] An Indonesian shipper is offering the first dollar bond from the country's industry in more than five years. President Joko Widodo must be hoping it succeeds.

PT Soechi Lines is planning to issue US$200 million of five- year dollar notes as the government banks on new infrastructure to revive a shipping sector plagued by a shortage of ports. Indonesia's largest private tanker operator met with potential investors in Singapore, Hong Kong and London this month, according to people familiar with the matter.

The take-up may be a barometer of foreign investors' faith in Mr Widodo's plan to plow US$6 billion into the seafaring nation's ports to spur trade amid the slowest economic growth in six years. The junk-rated firm's offer follows US$2.3 billion of defaults on dollar bonds by Indonesian companies in the past seven years as concerns about corporate governance mount.

"It will be hard for them to print without offering more than a 10 per cent yield," said Leong Wai Hoong, a Singapore- based high-yield bond manager at Nikko Asset Management Ltd, which controls about US$155 billion of assets and is underweight Indonesian junk bonds. "Even bigger operators with strong financial support couldn't survive the last downturn and no Indonesian high-yield shipping bond issuers have produced any good outcome."

It's about 40 basis points pricier to be an Asian junk- rated borrower than a month ago, with bonds yielding an average 9.52 per cent compared with this year's 9.11 per cent low in May, a Bank of America Merrill Lynch index shows. Their premium over Treasuries has widened by 42 basis points in the same period.

Moody's Investors Service and Fitch Ratings both scored Soechi's proposed debt four steps below investment grade. Only Chinese developers Times Property Holdings Ltd and Evergrande Real Estate Group Ltd were ranked lower among about US$40 billion of dollar bonds sold in Asia ex-Japan this year, data compiled by Bloomberg show.

The rating reflects Soechi's size and higher leverage incurred to fund expansion and start ship-building, said Moody's. But the firm has a big benefit in its long-standing relationship with state-owned oil company PT Pertamina Persero, which accounted for more than half of revenues last year.

"Soechi operates in a market with a high barrier of entry and the relationship with Pertamina has been delivering good earnings," said Taye Shim, a Jakarta-based strategist at Daewoo Securities Indonesia. "I don't think they will have any problem selling bonds, it's just a matter of borrowing costs." Soechi declined to comment ahead of the bond offering, spokesperson Yesy Ginting said by e-mail on June 19.

Years of overcapacity that shrunk freight rates have hurt shipping the world over. In Indonesia, shipping company PT Arpeni Pratama Ocean Line defaulted on US$141 million of bonds in 2010. PT Berlian Laju Tanker filed for bankruptcy protection in March 2012 with US$2.4 billion of debt as slumping rates and higher fuel costs squeezed its finances.

Mr Widodo now needs offshore investors to help realise his maritime ambitions. He plans to link industrial centres in Jakarta to a new port in the capital by building a road and raising canal bridges to accommodate barges, and wants to start building four more ports in October. Local law allows only Indonesian-flagged vessels to move goods between the 17,000 islands in the world's largest archipelago.

Southeast Asia's biggest economy grew 4.7 per cent in the first quarter of 2015, the weakest since the financial crisis, and Mr Widodo wants to lift that to 7 per cent within five years. He may have to move faster.

"There are policy disharmonies from different messages on taxes and the cost of doing business that's confusing to investors," said Daewoo's Mr Shim. "He needs to address these issues otherwise it would be hard to realise the growth target."