Indonesia Global Sukuk to Pay Record-Low Yield: Islamic Finance

Yudith Ho

Indonesia will offer its lowest- ever coupon for dollar-denominated bonds when it sells global sukuk as soon as next month, according to Manulife Asset Management Indonesia and BNI Asset Management.    

The fund managers, who oversee a combined $3.1 billion, expect the $1 billion issue to be sold at a yield of about 3 percent, lower than a sale of seven-year Shariah-compliant notes in November that paid a rate of 4 percent. The nation sold $2.5 billion of non-Islamic 10-year securities in April at 3.75 percent, the lowest for any Indonesian dollar sale.    

The premium investors demand to hold the country’s global sukuk due 2018 over Treasuries has narrowed 77 basis points since the notes were sold on Nov. 14 to 181 as Moody’s Investors Service restored Southeast Asia’s largest economy to investment grade.

The cost to protect Indonesian bonds from default dropped to the least since May 2011 on Sept. 14, a day after the Federal Reserve announced open-ended asset purchases. It’s now more expensive to insure Israeli and South African debt, both ranked at least three levels higher than Indonesia by Moody’s.    

“Indonesia’s risk has improved, as reflected in the market,” said Ezra Nazula, who manages Rp 24 trillion ($2.5 billion) at Manulife Asset Management, said in a Sept. 14 interview in Jakarta. “The timing is just right, if they do it soon, as there will be a lot of cheap money due to the Fed stimulus.”      
              
‘Still be Attractive’    

The sale will take place in the fourth quarter, Robert Pakpahan, acting director-general at the finance ministry’s debt management office in Jakarta, told reporters Aug. 23, declining to say what tenors would be offered.    

The premium investors demand to hold Indonesia’s 8.8 percent global sukuk maturing April 2014 over Malaysia’s 3.928 percent Islamic dollar notes due June 2015 has narrowed 24 basis points since the Nov. 14 sale to 30 basis points yesterday, the least since April 9, data compiled by Bloomberg show.    

Next quarter’s sale will still be attractive with a yield premium of as little as 160 basis points over Treasuries, Manulife’s Nazula said. Seven-year US government bonds yielded 1.21 percent yesterday.

Sonny Afriansyah, a Jakarta-based portfolio researcher at BNI Asset Management, said in a Sept. 14 interview that the offer would need to pay at least 3 percent.                      

‘Policy Slippages’    

Five-year credit-default swaps on Indonesian debt fell 63 basis points in the past year to 131 basis points on Sept. 14, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its debt agreements.    

Like-maturity credit-default swaps for bonds from Israel, rated six levels higher than Indonesia at Standard & Poor’s, fell 55 basis points in the past year to 133 basis points.    

Moody’s returned Indonesia to investment grade on Jan. 17, after Fitch Ratings in December, saying that the yields at November’s dollar sale, which were half that of the debut issue in 2009, were a factor in its decision. S&P refrained from raising the nation’s rating from the highest junk level in April, citing “policy slippages” such as the government’s failure to reduce fuel subsidies.                       

Length of Tenor    

“A lower coupon than the previous sale will be a supporting factor for S&P to return Indonesia to investment grade,” BNI Asset’s Afriansyah said. “We estimate the tenor will be the same or shorter than the previous sale as investors prefer shorter-tenor bonds to reduce risk.”    

Manulife Asset’s Nazula said the government wanted to extend its debt-maturity profile to reduce refinancing risk so a tenor of ten years was possible.    

“As it’s difficult to tell how long interest rates will remain low, yields would need to be higher” for a 10-year sukuk, he said.    

The average yield on global Islamic bonds declined 70 basis points, or 0.7 percentage point, in six months to a record-low 2.97 percent on Sept. 14, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. The difference between the average and the London interbank offered rate, or Libor, narrowed 51 basis points over the same period to 193 basis points, the HSBC/Nasdaq index shows.    

Average Shariah-compliant borrowing costs could decline to 2.75 percent by the end of the year as bond purchases by the US and Europe increase appetite for higher-yielding assets, Sergey Dergachev, a fund manager at Frankfurt-based Union Investment Privatfonds, said in an e-mail on Sept. 4.                   

‘Sukuk Prices Resilient’    

The low yields have spurred a 90 percent increase in worldwide sales of Shariah-compliant securities to $35.3 billion this year, data compiled by Bloomberg show. Offers totaled $36.7 billion in 2011.    

Islamic notes returned 7.6 percent in 2012, the HSBC/Nasdaq index shows, while developing-market debt climbed 14.3 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.    

“Sukuk prices are resilient against the global economic slowdown as demand for Islamic assets still exceeds supply,” said Moh Toyib, head of treasury at BNI Syariah, the unit of the nation’s third-largest state-owned bank that follows the tenets of the Koran, said in a Sept. 13 interview in Jakarta.

The offer would likely have a tenor of seven years or less “as interest rates tend to decline and the government won’t want to lock in current rates,” he said.

Bloomberg