Indonesia Offers $1.5 Billion Sukuk Yielding Most Since 2009

Indonesia is marketing dollar-denominated Islamic bonds at the highest yield since 2009 as it seeks to bolster its foreign-exchange reserves to support the plunging rupiah.

The nation is offering $1.5 billion of notes maturing in 5.5 years, the Finance Ministry said today. The notes will be offered at 6.375 percent, according to a person familiar with the matter who asked not to be named as the matter is private. That would be the highest rate for global Shariah-compliant securities since Indonesia paid 8.8 percent on its debut dollar sukuk in 2009. The country last offered global Islamic paper in November, selling $1 billion of 10-year securities at a record-low yield of 3.3 percent.

Bank Indonesia has burned through $19.8 billion of foreign-currency reserves this year to stem declines in the rupiah, which has weakened 14 percent against the dollar. The price guidance for the current offer is 4.64 percentage points more than for similar-maturity Treasuries, almost three times the 1.74 percentage points premium at the November sale.

“We are compromising by taking a shorter tenor with a hopefully reasonable yield,” said Dahlan Siamat, Islamic financing director at the debt management office in Jakarta. “While the government wants a longer-term horizon, we have to consider market appetite, especially the preference for shorter tenors, and secondly the cost.”

Worst Performers

The government hired Standard Chartered Plc, Citigroup Inc. and Deutsche Bank AG to arrange the sale, Robert Pakpahan, director general at the debt management office in Jakarta, said in July. A series of investor meetings for the offer finished on Aug. 27, according to the office’s Siamat.

Indonesia follows South Korea in tapping the global debt market, after Asia’s fourth-biggest economy drew bids for five times the $1 billion of bonds it offered last week. The 10-year notes were sold at 4.02 percent, 115 basis points more than similar-maturity Treasuries, the Finance Ministry said.

Indonesia’s dollar bonds are the worst performers in 2013 among 11 Asian emerging markets tracked by HSBC Holdings Plc indexes, declining 19 percent. The yield on the nation’s 3.3 percent dollar sukuk due November 2022 rose 3.42 percentage points since the notes started trading on Nov. 19 to 6.67 percent today, data compiled by Bloomberg show, handing investors a 24 percent loss. The rate fell 17 basis points today after the current offer was announced.

‘External Pressures’

“Indonesia’s current fundamentals aren’t conducive for selling debt, but the government is in need of dollar funds, so they settled for the shorter tenor,” said Akbar Syarief, a money manager at PT MNC Asset Management in Jakarta, which oversees about $485 million. “The offered yield is very attractive for the tenor so I expect demand to be good.”

Standard & Poor’s rates the offer at BB+, the top junk level, to reflect the “weak policy environment and external pressures,” it said in an Aug. 22 statement. Moody’s Investors Service rank the debt at the lowest investment grade along with Fitch Ratings, which cautioned last month that Indonesia’s widening current-account deficit may destabilize the economy and lead to a rating downgrade.

The shortfall in the broadest measure of trade was $9.8 billion in the second quarter, the largest in data compiled by Bloomberg going back to 1989. Foreign-exchange reserves fell 18 percent this year to $93 billion last month, central bank figures show.

Sales Target

“The government must have decided that supporting foreign reserves is worth paying a steep price to sell global sukuk,” Angky Hendra, Jakarta-based head of fixed income at PT Batavia Prosperindo Aset Manajemen, which oversees 13 trillion rupiah ($1.1 billion), said last month. “The concern is that if reserves keep falling, then investor confidence will worsen.”

The average yield on emerging-market sovereign dollar notes was 6.17 percent yesterday, near the 6.27 percent reached on Sept. 5, which was highest since October 2011, according to the JPMorgan Emerging Markets Bond Index. The rate has climbed 180 basis points this year.

The average yield on global bonds that pay returns on assets to comply with Islam’s ban on interest rose 148 basis points this year to 4.29 percent on Sept. 6, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

Southeast Asia’s largest economy raised its 2013 net debt sales target to 231.8 trillion rupiah in June, from 180.4 trillion rupiah, as it seeks to fund an estimated budget deficit of 2.38 percent of gross domestic product this year, which would be the largest in data compiled by Bloomberg going back to 2004.

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