Insight & Analysis

Enter the dragon: Komodo bonds prove a hit

Published: Mar 2018

The first Komodo bonds have proven a hit with investors. Here is what you need to know about this new asset class.

Last month, Indonesian state-owned construction company, Wijaya Karya (Wika), issued its first Komodo bonds on London Stock Exchange, raising IDR4trn (US$295.7m equivalent).

They joined a small group of Indonesian companies pioneering global Indonesian rupiah bonds, following the debut issuance late last year by state-run toll road operator, Jasa Marga.

Both deals proved popular with investors. Wika’s three-year term debt paper with a coupon rate of 7.7% was more than two and half times oversubscribed. Jasa Marga’s paper was nearly four times oversubscribed.

“Demand for both bond issuances was diverse in terms of investor type and geography,” says Omair Mohyal, Fixed Income Product Specialist at London Stock Exchange Group. “This demonstrates the strong global appetite for these instruments and also the benefits of a London listing.”

Fuelling ambitions

Fuelling the growth of Komodo bonds is the Indonesian government. It sees Komodo bonds as a primary tool to support its infrastructure investment plans and propel its rapidly expanding economy.

Indonesia has huge infrastructure requirements and many Indonesian companies derive their revenues in Indonesian rupiahs. Before the Komodo bond, these companies would either issue rupiah bonds domestically or US dollar-denominated bonds on the international markets.

However, limited domestic demand for rupiah-denominated bonds and a weakening IDR against the USD, which saw many companies struggle to service their USD debts, promoted the need for an alternative product to be created.

“Komodo bonds are helping to solve the problem of volatility risk in the foreign exchange market,” explains Mohyal. “The rupiah-denominated global bond places the currency risk on the investor. In other words, investors in Komodo bonds bear the exchange risk if the value of the bond depreciates.”

Mohyal adds that there are additional benefits for Indonesian issuers, including giving them the ability to secure new funding sources, access a greater pool of international liquid capital and benefit from broader market expertise.

Investor interest

From the investors’ perspective, there are multiple factors driving investor interest in Komodo bonds. Mohyal notes that they offer investors a more tax-friendly structure than onshore rupiah bonds. “Komodo bonds are also often linked to government projects with a clear use of proceeds, making them more transparent instruments for investors.”

More broadly speaking, investor confidence in Indonesia has increased markedly since it was raised to ‘Investment Grade’ by all major rating agencies last year – the first time since the Asian Financial Crisis. “In an era of low yielding credit assets in the West, investors can get significant uptake from Indonesian credit, even after hedging costs,” says Mohyal.

More to come

Given the backing from the Indonesian government and the success of the Jasa Marga and Wika issuance, it is expected that more Komodo bonds will hit the market this year. “The Indonesian government has been vocal in its support of Komodo bonds and believes there is a strong pipeline of potential SOE [state-owned enterprise] issuers,” says Mohyal. “In the near future, we also expect potential Komodo bond listings from Indonesian private companies.”

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