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Indonesia Inc looks to refinance debt onshore as dollar rises

[SINGAPORE] Indonesian companies are turning to the local debt market to refinance dollar debt in a bid to limit the impact of currency volatility and capitalise on growing domestic demand for bonds.

Animal feed manufacturer Japfa Comfeed is among those looking at rupiah bonds to repay its US dollar obligations. "We might refinance the dollar debt through rupiah issue or another dollar offering or both," said Elvina Apandi Hermansyah, vice-president and head of investor relations.

Japfa has US$199 million of dollar debt maturing in 2018. It has regulatory approval to raise up to 3 trillion rupiah (S$323.3 million), of which it raised 1 trillion rupiah last year. Its onshore bonds have a A+ rating from Pefindo.

Other companies are also looking at rupiah bonds.

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Tyre-maker Gajah Tunggal said in an email to IFR it would look at rupiah bonds depending on market conditions. The company said it planned to refinance all or part of its dollar debt through loans and/or bonds before the end of the first half of 2017.

Gajah has US$500 million of dollar bonds maturing in February 2018 that need to be refinanced, and is under pressure from rating agencies to confirm a concrete refinancing plan. "Gajah Tunggal may possibly look at raising money through rupiah bonds and/or loans," said R Lakshmanan, research analyst at CreditSights.

The tyre-maker has more than half of its revenue in US dollars. It might refinance part of the debt with a dollar offering and part through an onshore offering, said another analyst.

In December, S&P cut the bond rating to CCC+ from B-, while Moody's has downgraded it to B3 from B2, as concerns over refinancing risk outweighed a solid operating performance and strong market position.

Chandra Asri Petrochemical also turned to the domestic bond market in November, when it issued 500 billion of rupiah bonds to replace dollar debt.


The trend coincides with efforts of Indonesian authorities to encourage more domestic buying of rupiah bonds.

In January last year, the Financial Services Authority (OJK) introduced mandatory government bond holdings for insurance and pension funds.

Indonesia's social security fund, BPJS, was required to have 50 per cent of its employment fund's assets in government bonds or state-owned enterprise infrastructure bonds before the end of 2016, while life insurance companies and pension funds had to hold 20 percent.

In November, the new rules led to a six-fold year-on-year increase to 35.98 trillion rupiah in pension funds' net purchases of government bonds, while insurance companies more than tripled their net purchases to 65.9 trillion rupiah.

The requirement for insurance and pension funds will increase by 10 per cent to 30 per cent at the end of 2017, while it remains unchanged for the social security fund.

In November, the regulator also allowed non-bank finance institutions to invest in high-quality corporate bonds.

"We expect the total insurance, social security fund and pension fund demand to be 85-115 trillion rupiah in 2017," said Nagaraj Kulkarni, senior rates strategist with Standard Chartered.

HSBC estimates extra demand stemming from the new rules at 68 trillion rupiah, with the bulk coming from life insurance companies for government bonds in 2017.

"Currently, the market appetite is good for rupiah bonds because pension funds, insurance funds and even some repatriated money is being invested in local rupiah bonds," said Hermansyah of Japfa Comfeed. "The domestic rupiah bond market is able to handle big issues."

However, some analysts feel the local bond market is not yet able to absorb the kind of large deals that can be achieved in the dollar market.

"The bond market in Indonesia is still not very deep," said CreditSights' Lakshmanan. "Companies that need huge amounts of funds (typically more than 2 trillion rupiah) from the bond market may still have to rely on offshore funding."

Foreigners own 37 per cent of Indonesia's rupiah government bonds, making the country vulnerable to capital outflows and exposing the local market to the risk of rising yields.

Analysts say that continued buying of bonds by insurance companies will minimise volatility in times of adverse global events. "We think these regulations are important from a NBFI's (non-banking financial institutions) own prudential risk-management perspective," said Standard Chartered's Kulkarni. "They will also diversify the investor base and strengthen the domestic bid for government securities market from local structural investors."


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