Indonesia’s biggest non-oil export has become its bond market’s Achilles heel.
Coal miners Bumi Resources and Berau Energy Coal extended losses this year, making Indonesian distressed US dollar notes the worst-performers in emerging markets. The Jakarta-based companies were among 13 local issuers downgraded in 2014, as cuts at Standard & Poor’s and Moody’s Investors Service outstripped upgrades by the most in at least five years. The nation accounted for 79 percent of defaults in Southeast Asia since the end of 2008.
President Joko Widodo needs to win support from global investors as he plans to build 25 dams in five years, 24 ports and six mass transport systems. Indonesia delivered Asia’s worst returns for US currency notes over the last two months, gaining just 0.1 percent, jeopardizing its rank as the region’s second-best market this year, Bank of America Merrill Lynch indexes show. The central bank has warned over overseas corporate debt in an economy growing the least since 2009.
“We don’t expect a reversal in the ratings downgrade trend and we remain cautious to expose ourselves to the Indonesian coal mining sector,” Joep Huntjens, a Singapore-based senior money manager at ING Investment Management, which oversees about 180 billion euros ($225 billion) globally, said by e-mail Nov. 14. “Policy makers seem to be aware of the negative reputational consequences of defaulting US dollar bonds.”
Indonesian companies missed payments on $1.78 billion of US currency notes since the end of 2008, Bloomberg-compiled data show. The Bakrie family dynasty’s mining, property and phone services group, which controls Bumi, has defaulted on three notes totaling $1.24 billion since 2010.
Bumi and Berau are beset by concerns over finances and management after coal tumbled 26 percent this year. Declines of their notes have contributed to an average 34.9 percent loss for Indonesian distressed securities this year through Monday, the poorest performance in a Bank of America Merrill Lynch index of developing nations.
Berau’s 12.5 percent notes due July 2015 fell 29 percent this month to 53.331 cents on the dollar as at 10:35 am in Jakarta on Tuesday, according to Bloomberg-compiled prices. Bumi’s $700 million of 10.75 percent notes due October 2017 dropped 24 percent over the same period to a record low 27.625 cents.
“General discussions show creditors understand there are no easy fixes,” Chris Fong, a Jakarta-based spokesman for the Bakries, said in a Nov. 12 e-mail. “They know the assets are world class, prices simply need to improve, and they will.”
While downgrades are expected in tough times, assets held by Bumi will survive and become even stronger, he said.
S&P lowered its ratings and outlook on Indonesian borrowers 11 times this year compared with 4 upgrades, its weakest ratio of winners to losers since 2009, according to data compiled by Bloomberg. Moody’s proportion is the lowest since 2007.
Bank Indonesia is taking note. Local companies’ foreign debt has now surpassed the government’s, more than tripling in the last nine years to $156 billion at the end of August, it said in an Oct. 30 statement. That’s equivalent to about 54 percent of the nation’s external debt.
Liquidity risk is “escalating as the value and share of short-term private external debt increases,” the central bank said. “Meanwhile, a mounting debt-to-income ratio is indicative of an increase in overleverage risk.”
S&P lowered Berau’s rating by two steps on Nov. 7 to CCC+, or seven levels below investment grade, amid a lack of detail on refinancing plans for its July 2015 notes. Three days later, the ratings company declared Bumi in default after it delayed a coupon payment on securities maturing in 2017.
Berau postponed a plan to refinance the $450 million of bonds in August, citing unfavorable market conditions. The average yield for junk-rated local companies climbed to 6.53 percentage points above Treasuries on Monday from 5.86 three months earlier, according to Bank of America Merrill Lynch.
The fallout in Indonesia remains limited to the coal industry and the nation’s companies aren’t the biggest offenders in emerging markets, according to UBS Global Asset Management, which manages about $679 billion globally.
“It’s industry-specific, there is no sense of overall market stress,” Ashley Perrott, Singapore-based head of Pan Asia fixed income at UBS Global, said by phone Nov. 14. “There are black sheep around emerging markets, in Russia, Argentina, and they’re much bigger black sheep than what you’re getting in Indonesia at the moment.”
The cost to insure Indonesia’s sovereign debt against non-payment has dropped in 2014. The five-year credit-default swap has fallen 93 basis points to 140 on Monday, according to data provider CMA. That’s higher than the 89 for the Philippines and 84.5 for Malaysia. The rupiah gained 0.2 percent this year, compared with the 1.2 percent drop for the peso and 2.2 percent slide for the ringgit.
Dollar bond issuance from Indonesian companies has dropped 30 percent to $4.78 billion this year, the lowest since 2011, according to data compiled by Bloomberg.
To keep a lid on leverage, Bank Indonesia has proposed tightening rules from Jan. 1, 2016, to bar local companies from selling foreign-currency debt if they are graded weaker than BB or equivalent, according to the Oct. 30 statement.
The likes of Bumi and Berau will be watching closely.
“They have one common denominator which is the aggressive use of debt in good times,” Xavier Jean, a Singapore-based credit analyst at S&P, said on Nov. 11. “Investors get some form of compensation through higher interest payments.”