Tycoon Bucks Indonesia Bond Slump With Dollar Sale: Asean Credit

Jan 16, 2014 11:11 pm ET

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Jan. 17 (Bloomberg) -- PT Alam Sutera Realty is set to cut costs selling dollar-denominated bonds, bucking a selloff in Indonesian developer debt, as property tycoon The Ning King profits from targeting first-time home buyers.

Alam Sutera, which for almost two decades developed a town west of Jakarta comprised of 30 residential clusters, intends to raise $225 million selling seven-year notes, to buy back bonds sold in March 2012. The new paper should win a lower coupon than the existing 10.75 percent 2017 dollar securities, which now yield 8.22 percent, after the company’s credit rating was upgraded by Standard & Poor’s earlier this month.

“We’re confident Alam Sutera can offer its new bonds at about 9 percent, which should lower its debt burden,” said Akbar Syarief, a fund manager at PT MNC Asset Management, which has the equivalent of $250 million in assets and is interested in buying at that level. “Having a single-digit coupon will also have a positive effect on its shares and loans.”

The company’s 82-year-old major shareholder, whose wealth has slipped to about $708 million from more than $1 billion last May, is cutting borrowing costs even as a slumping rupiah, home- loan curbs and rising interest rates drive a selloff in the nation’s corporate debt. Yields on Indonesian builders have jumped 204 basis points over the past 12 months versus a 71 basis-point rise for emerging-market property developer debt, Bank of America Merrill Lynch indexes show.

Investor Trust

“We paid a high rate to tap the international capital markets the first time,” Hendra Kurniawan, Jakarta-based corporate secretary at Alam Sutera said in a Jan. 8 interview. “But now that we’ve proven to be a good creditor, we plan to lower our coupon by refinancing this debt.”

Kurniawan said the company plans to “become a frequent player” in the bond market, which should “improve investor trust in the company.”

A record current-account deficit in Southeast Asia’s largest economy has prompted Bank Indonesia to raise its benchmark rate by 1.75 percentage points since early June, leading to higher mortgage costs. Stricter home-loan rules are also sapping demand, denting residential builders’ earnings, Fitch Ratings Ltd. said in a report last month.

“The government is trying to cool down the steep house- price increases via stricter regulation,” Erlin Salim, a Jakarta-based analyst at Fitch, said in an interview. Alam Sutera has “quite sufficient land bank inventory on their books, so we expect them to slow down their land acquisition to compensate for lower presales and demand in 2014.”

Alam Sutera’s profitability is still above average due to its low land costs and less reliance on a single project, S&P said in its Jan. 7 report, as it raised the company’s rating one level to B+, the fourth-highest speculative grade.

Positive Effect

In a sign investor confidence is returning, Indonesia raised $4 billion selling dollar debt last week, matching a record for the region’s largest-ever sovereign offer.

Dollar bonds in Indonesia have fallen 11.6 percent over the past 12 months, the worst among 11 Asian nations tracked by HSBC Holdings Plc. The extra yield investors demand to own the notes over U.S. Treasuries touched a more than four-year high of 468.5 basis points in September as foreign investors withdrew from Indonesia after the Federal Reserve indicated it may begin dialing back its economic stimulus. Spreads averaged 374.3 basis points on Jan. 15.

Yield Buffer

“We have an overweight recommendation on the Indonesian credit space,” Hong Kong-based Dilip Shahani, HSBC’s head of global research for the Asia-Pacific region, wrote in a note last month. “In particular, we recommend longer-dated securities for the buffer they offer against future Treasury market volatility.”

Indonesia sold $2 billion of debt due in 10 years to yield 5.95 percent and $2 billion of securities maturing in 30 years at 6.85 percent, according to a Jan. 8 finance ministry statement. Yields on the nation’s existing notes due 2023 have fallen to 5.35 percent as of Jan. 16 from 5.74 percent the day of the sale, data compiled by Bloomberg show.

Alam Sutera is among Citigroup Inc.’s top property picks in Indonesia, according to a report published by the New York-based investment bank in November. These developers are making a push into the “more resilient” mass market, targeting first home buyers as demand slows and mortgage regulations tighten, analyst Felicia Asrinanda Barus said.

The -- pronounced Tay -- has seen his wealth diminish as Indonesia’s rupiah depreciated 21 percent against the dollar last year, while shares in Alam Sutera declined 28 percent.

Slower Investment

He owns half of Alam Sutera and about 60 percent of Bekasi Fajar, which controls the largest industrial land bank among its publicly traded peers in Indonesia. Alam Sutera last month set its capital expenditure for 2014 at 1.2 trillion rupiah ($99 million) to 1.5 trillion rupiah, versus 3 trillion rupiah in 2013, amid a slowing property market and political uncertainty before nationwide elections.

The yield on the new debt should be between 9.8 percent and 10 percent due to its longer maturity and new issue premium, Zhulin Chen, research analyst at Credit Agricole CIB, Hong Kong, wrote in a report yesterday.

“Taking into account the company’s decent credit profile - - relatively low leverage, ample liquidity and no debt due within one year, we think the new bonds offer value at 10.5 percent or better,” Credit Agricole’s Chen wrote. “But if the new bonds price tight, we would prefer long-dated single-B bonds in the Chinese property sector.”

--With assistance from Rachel Evans in Hong Kong. Editors: Katrina Nicholas, Sandy Hendry