By Manju Dalal and Saumya Vaishampayan
Indonesian companies are struggling with a weak currency and
poorly hedged dollar debts -- hurting investors in Southeast Asia's
largest economy, which was until recently a hot destination for
emerging markets specialists.
The strain is another illustration of how a stronger dollar and
higher U.S. borrowing costs are hitting poorer nations. The moves
have boosted the appeal of relatively safe U.S. assets, threatening
what had been a reliable source of funding for countries like South
Africa and Argentina.
Foreign investors had flocked to Indonesian junk bonds in recent
years, wooed by juicy yields and robust economic growth. Outside of
mainland China, Hong Kong and Japan, Indonesian companies are
Asia's biggest issuers of below investment-grade bonds, with nearly
$33 billion outstanding, according to data from Thomson
Reuters.
The rupiah's more than 8% slide in 2018, however, has pressured
companies with dollar debts. Earlier this month the currency
touched its lowest against the greenback since the Asian financial
crisis.
"Currency is the biggest threat we are facing," in Indonesia,
said Nate Weisshaar, portfolio manager and senior analyst at Motley
Fool Asset Management. He said the country was "an opportunity in
the long term but our approach is very skeptical now".
Indonesia's central bank has required most companies to hedge
some currency exposure since 2015, after an earlier bout of rapid
depreciation. However, many firms economize by using a combination
of options. These are derivatives that give the holder the right,
but not the obligation, to buy a currency, a bond, or another
instrument at a certain price and by a certain time.
Indonesian borrowers would typically both buy and sell options,
using a strategy known as a call spread. This way, hedging costs
might only total 1.5% to 3% of the debt protected, compared to
roughly 4.5% for other kinds of hedges, traders and analysts
said.
In this system, a bond issuer might buy call options to purchase
dollars at a rate of 12,000 rupiah, for example, and offset the
cost by selling call options at, say, 14,000 rupiah per dollar.
That locks in an exchange rate for repaying the bond or meeting
interest payments. But the second part of the trade means the
company is only fully protected until the rupiah weakens to 14,000
per dollar. Because it has agreed to sell dollars at this rate, it
is not protected against any further weakness. This plan has not
worked out in a year of dramatic currency moves.
Companies whose hedges have fallen short, and which make most of
their sales domestically will now have a tougher time servicing
hard-currency borrowings. They can buy new hedges, but at an
additional cost. If investors remain wary of riskier emerging
market debt, these enterprises could also struggle to issue new
dollar bonds, leaving them dependent on higher-cost local debt.
Property developers are among those that have sold international
debt and employed call spreads, entering derivative deals with
Deutsche Bank, JPMorgan, Morgan Stanley, Nomura, and other
international banks.
Billionaire tycoon Mochtar Riady's Lippo Group, one of
Indonesia's biggest conglomerates, is among those caught out. Its
property development unit, Lippo Karawaci, has borrowed largely in
dollars -- but most of its hedges only protected it against the
rupiah weakening to 14,500 per dollar, which happened last month.
One dollar bought 14,816 rupiah recently.
Similarly, fellow property developer Alam Sutera Realty's
safeguards won't offer more protection if the rupiah weakens beyond
15,000 to the dollar, its latest earnings report shows. Lippo Group
declined to comment. Alam Sutera did not respond to requests for
comment.
Many other companies will be exposed if the rupiah passes
15,500, market participants said.
The stresses are reflected in a steeper selloff than the wider
credit market. The yield on an index of Indonesian corporate junk
bonds in dollars has topped 8.2%, up from roughly 4.8% at the end
of last year. Yields on a broad gauge of emerging market debt are
roughly 7.8%, up from about 5.9% at the end of 2017, ICE Bank of
America Merrill Lynch indexes shows.
"The market has a tendency to paint Indonesian companies with a
broad brush whenever the rupiah weakens," said Paul Lukaszewski,
head of Asian corporate debt at Aberdeen Standard Investments --
although he said currency risks vary markedly from business to
business.
Most Indonesian dollar debt isn't due until 2020, giving
borrowers some breathing room. Nonetheless, a spate of postponed
deals shows how much market sentiment has worsened, fueled by
global investors' hesitation to jump into emerging markets right
now.
In April, Alam Sutera hired bankers for a dollar deal that never
happened. Last month, fellow developer Intiland Development pulled
a bond issue citing tough market conditions, despite offering a
yield of 11.5%. And power producer DSSP Power Sumsel hasn't been
able to launch a deal due to lack of investor demand.
"Companies will find it very difficult now to access the dollar
market," said Trung Nguyen, a senior analyst at Lucror
Analytics.
--I-Made Sentana contributed to this article.
(END) Dow Jones Newswires
September 23, 2018 14:14 ET (18:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.