Treat the Komodo bond hype with the scepticism it deserves
Offshore Asian local currency bonds are hot when the outlook for the relevant local currency is rosy, and fall out of favour when that rosiness fades
MUCH like the breath of the man-eating reptile they are named after, Komodo bonds – bonds issued offshore by Indonesian entities in rupiah – are hot right now. Energy giant Perusahaan Listrik Negara earlier in the month printed a 3.23 trillion rupiah (US$241 million) multi-trancher, coming in the slipstream of a late January Komodo trade for engineering company Wijaya Karya, which raised around US$400 million-equivalent at three years.
This is all very well, but we’ve been here before. I’m referring to the mad enthusiasm for offshore issuance in Asian local currency debt which has done the rounds in the region, in the shape of global peso, Dim Sum, Panda and Masala bonds.
Despite the initial hype, these instruments have failed to demonstrate staying power, and to my mind are best regarded as coupon-bearing instruments with a foreign exchange call embedded.
In other words, these bonds are hot when the outlook for the local currency in which they are denominated is rosy – usually thanks to an auspicious macroeconomic or political backdrop – and fall out of favour when that rosiness fades.
It’s not simply about that, however. What these instruments have been bedevilled by has been a telling lack of liquidity in the secondary market. After the initial flush of excitement, holders have decided that they would have been better off simply buying local government bonds, assuming that the relevant withholding tax regime allowed rebates where double taxation treaties were in play.
But that is to see the whole thing from the point of view of the investors’ experience. From an issuer’s point of view, when an arena like the nascent Komodo market is buzzing, the availability of size and tenor versus what can be achieved in the local market is nirvana.
Wijaya Karya would have been unlikely to have achieved that US$400 million print without the traction of deep offshore liquidity, even though the local bid for the deal was strong. And that bid can be vaguely approximated as anchored in a bullish stance on the rupiah, given Indonesia’s stable rates environment, improving current account deficit position thanks to a rallying oil price, declining inflation, and positive ratings dynamic.
The country got a shot in the arm from ratings agency Fitch last December when it was bumped up to investment grade, just months after S&P had similarly elevated the sovereign out of junk territory.
All of this helps explain the turbo-charged performance of Indonesian bonds last year, led by long-end government paper which surged a whopping 17%, versus 12% for the Asian government bond complex. Foreign holdings of Indonesian bonds ballooned last year hitting a record high of 41% of the outstanding issued debt in September, and holders were well rewarded for their bullish call.
But I wonder whether the emergence of the Komodo bond market is simply a late-stage phenomenon that marks the turn. Foreign investors were aggressive sellers of Indonesian government bond paper in February, dumping around US$1.4 billion-equivalent in the first two weeks of the month.
We shall soon find out if the capital flight which all countries with freely floating currencies are vulnerable to emerges. Should there be a rush for the exits, I would be rather nervous in making a bid enquiry on my newly acquired Komodo paper. I suspect it will become the most illiquid debt instrument in town.
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27 Feb 2018