Gajah Tunggal Rues Hedging Costs as Garuda Tracks Dollar Outlays

  • CFOs examine hedging costs amid weakening local currency
  • Japfa Comfeed says no plans to hedge rest of its dollar notes

Indonesia’s dollar debtors are looking at alternatives to hedging their foreign-currency liabilities as the rupiah languishes near 17-year lows, increasing the cost to protect against further weakness.

“Hedging costs are exorbitant right now,” Christopher Chan, president director of Jakarta-based tire maker PT Gajah Tunggal, said at a conference in the capital Tuesday. I Gusti Ngurah Ashkara Danadiputra, chief financial officer of Indonesia’s flagship carrier PT Garuda Indonesia, said the cost of hedging for two months using cross currency interest rate swaps is about 9.5 percent.

China’s devaluation of the yuan, along with weak prices for the country’s commodity exports and dwindling confidence in the president’s reform agenda, have worked to weaken the rupiah 15.5 percent against the U.S. dollar this year, making it the worst-performing currency in Asia outside of Malaysia’s ringgit. The rupiah also has the second-highest implied volatility among currencies in the region.

“Pricing is a function of volatility,” Chan said. “It’s more expensive, especially when the rupiah has gone so high.”

Standard & Poor’s has downgraded junk-rated companies from the Southeast Asian nation seven times this year and made no upgrades, data compiled by Bloomberg show. The rating cuts included Gajah Tunggal, PT Japfa Comfeed Indonesia and conglomerate PT MNC Investama, with S&P citing foreign-currency exposure in all three cases.

Cost Mismatches

Japfa Comfeed, which makes animal feed and operates aquaculture farms, said in July it plans on raising prices to mitigate foreign-exchange risk. The Jakarta-based company has hedged $60 million of its $225 million of dollar bonds and believes operating earnings will remain flat or be slightly lower in 2015 versus a year ago. Japfa Comfeed imports about 55 percent to 60 percent of its raw materials.

Kevin Monteiro, the company’s chief financial officer, said Tuesday he hasn’t taken out a hedge for the rest of the dollar notes. Instead, he’s been hedging operational cost mismatches of more than $100 million a year.

“It’s similar to hedging the bonds themselves,” he said. Monteiro said that more than half of Japfa’s business revenues, while denominated in rupiah, are pegged to the dollar. The remaining exposure he hedges with short-term contracts, he said.

Japfa Comfeed’s 6 percent 2018 notes are trading at 68.32 cents on the dollar compared with 93.75 cents at the start of the year, Bloomberg-compiled prices show. Gajah Tunggal’s $500 million of 7.75 percent 2018 debentures have lost 43 percent this year and are trading at 48.29 cents on the dollar.

Rolling Over

Chan at Gajah Tunggal said he is trying to restructure the company’s business in order to have a greater focus on exports, thus increasing dollar revenues to match foreign-currency liabilities, instead of adding financial hedges.

Garuda’s Danadiputra meanwhile has been rolling over about $100 million of interest rate and currency hedges on a monthly basis to cover the group’s operational costs in dollars. “It’s more expensive to do a straight hedge for the dollar bonds until maturity,” he said in Jakarta Tuesday on the sidelines of the Euromoney Indonesia Fixed Income & High Yield Bond Forum. “It’s cheaper to keep rolling over” the operational cash flow that has a currency mismatch. 

“Currency depreciation has been one of the factors that has contributed to the credit deterioration of Indonesian corporates,” Atul Jhavar, a Singapore-based director of debt capital markets at Barclays Plc, said at the conference. “In a volatile currency environment, companies that have natural hedges will see benefits.”

Two Indonesian corporates that have hedged their foreign-currency bonds more fully include property developers PT Lippo Karawaci and PT Kawasan Industri Jababeka. Tim Beekelaar, an investor relations official at the latter, said the company’s currency options cost 2 percent a year and are still in the money even at current rupiah levels.

Fitch Ratings Ltd. today assigned Jababeka a national long-term rating of A with a stable outlook. An A national rating denotes expectations of low default risk relative to other issuers or obligations in the same country. Fitch said in a statement the company’s power plant operations provide “good earnings visibility and also is a natural hedge for Jababeka’s U.S. dollar-denominated borrowings.”

Jababeka’s $260 million of 7.5 percent securities due 2019 and sold at 100 cents on the dollar in September last year are trading at 91.42 cents, having lost 0.48 percent since Dec. 31. Lippo Karawaci’s 6.125 percent dollar bonds due 2020 are trading at 93.79 cents.

Lippo Karawaci renewed its currency swaps in April, investor relations official William Wijaya said. “Management is reviewing whether to re-hedge, but the cost is so expensive we’re reviewing whether it makes sense,” Wijaya said.

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