Indonesia’s Second Samurai Bond May Price at Investment Grade

Indonesia may sell its second Samurai bond at a similar yield spread to Mexico, whose debt is rated four levels higher, according to Meiji Yasuda Life Insurance Co. and Asahi Life Asset Management Co.

Southeast Asia’s largest economy may be able to price 6 trillion rupiah ($672 million) of 10-year yen-denominated debt being sold next month at close to 50 basis points above the 10-year yen swap rate, the premium paid by Mexico in an Oct. 20 sale of 150 billion yen ($1.86 billion) of similar-maturity samurai bonds, the Tokyo-based fund managers said. Indonesia’s government told investors it expects a spread of 55 to 60 basis, a person with direct knowledge of the matter said yesterday.

An improving economy and credit-rating upgrades are bolstering demand for Indonesian debt as near-zero interest rates in Japan fuel demand for securities offering higher yields than domestic debt. The International Monetary Fund forecast this month that economic growth will accelerate to 6 percent this year from 4.5 percent in 2009, while Japan Credit Rating Agency, Fitch Ratings and Standard & Poor’s have all raised their assessments of the Southeast Asian nation this year.

“Their credit rating is on an upgrading trend,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co. in Tokyo, which has $8.5 billion of assets under management. “Even with the tight spread, Indonesia’s samurai bonds are relatively very attractive for Japanese investors,” he said in an interview on Oct. 21.

JBIC Guarantee

Indonesia hired Daiwa Securities Capital Markets Co. and Nomura Securities Co. to help sell the yen-denominated bonds, which are backed by the state-owned Japan Bank for International Cooperation. The JBIC also guaranteed Mexico’s samurai bond offer.

Finance Minister Agus Martowardojo said Oct. 26 the government expects to receive the proceeds of the sale Nov. 12. Indonesia sold 35 billion yen of 10-year samurai bonds in July 2009 at 2.73 percent.

The rate on Japan’s 10-year bonds was 0.82 percent on Oct. 6 and 7, the lowest level since June 2003, after its central bank cut its benchmark interest rate to a range of zero to 0.1 percent and pledged to buy up to $60 billion of assets to stimulate growth.

Indonesia has been selling debt on domestic and international markets this year to fund a budget deficit, which Martowardojo said may reach 1.5 percent of gross domestic product in 2010. It last tapped overseas markets with the sale of $2 billion of 10-year dollar bonds in January.

Rating Upgrades

The Japan Credit Rating Agency lifted its assessment of Indonesia to investment grade in July. Fitch Ratings raised its rating for Indonesia in January to BB+, the highest non-investment grade. Standard & Poor’s upgraded Indonesia in March to BB, while Moody’s Investors Service rates Indonesia Ba2. S&P and Moody’s both rank Indonesia two levels below investment grade.

Mexico, Latin America’s second-largest economy, is ranked Baa1 at Moody’s, the third-lowest investment grade. S&P and Fitch assess the country at BBB, two notches above non-investment rank.

“With the lowest spread five basis points more than what Mexico got, demand is stronger now,” said Toshiaki Takahashi, who helps manage about $300 billion at Tokyo-based Meiji Yasuda. “That means the spread may be probably set at 55 basis points. It would be very popular.”

The extra yield investors demand to buy Samurai bonds instead of Japanese government debt has narrowed 68 basis points this year to 1.01 percentage points, according to Nomura, Japan’s biggest brokerage. The spread reached 0.98 percentage point on Oct. 14, the lowest since November 2007.

Growth Outlook

Samurai sales, excluding private placements, amounted to 1.52 trillion yen this year through Oct. 22, compared with 1.17 trillion yen in the same period in 2009, according to data compiled by Bloomberg.

Overseas investors have poured money into Indonesian assets to profit as the economy improves. Foreign holdings of the nation’s local-currency bonds increased 82.7 trillion rupiah ($9.3 billion) this year to 190.7 trillion as of Oct. 22, according to figures from the finance ministry. Bank Indonesia said on Oct. 5 it expects gross domestic product to increase 6 percent to 6.3 percent in 2010, and between 6 percent and 6.5 percent next year.

“The local economy is very healthy,” said Tetsuo Ishihara, a senior credit analyst at Mizuho Securities Co. in Tokyo. “This is a very good investment opportunity.”

Samurai bonds, named after Japan’s feudal warrior class, were first issued in 1970 when the Manila-based Asian Development Bank, funded by regional governments to reduce poverty, issued the debt.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE