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Rising Global Investor Appetite For Indonesian High Yield Corporate Bonds

Globally, lower interest rates on the back of multiple quantitative easing carried out in Western economies has stimulated investors to look beyond domestic fixed income investment options. Indonesia's corporate bond market has grown steadily in recent years as a result of increased participation from such global investors. The country's strong economic fundamentals, and future growth prospects has earned the country Investment grade status last year and underpinned demand for its high yielding corporate bonds.

For the full year 2012, Indonesia booked an economic growth of 6.2%, following 6.5% expansion in 2011. Manufacturing, services and construction all contributed to the growth while mining sector output growth was a drag. Indonesian economy is forecasted to grow at around 6.2-6.5% in 2013 supported by exports and pre-election spending before current account deficit related policy adjustments are expected to slow growth to 6% in 2014. Private consumption, which accounts for 55% of the country's nominal GDP, continued to be strong, supporting corporate earnings. The Indonesian Government is increasingly selling longer dated bonds, which is another sign of strong market confidence in the economy of this region, which is making them more resilient to possible volatile capital flows.

Early last year, global rating agencies upgraded Indonesia's sovereign credit ratings to investment grade for the first time. Fitch upgraded the country's long term and foreign currency credit rating to BBB- from BB+, while Moody's elevated Indonesia's long tem issuer rating to Baa3 from Ba3. The credit rating agencies cited that rating upgrade was triggered by Indonesia's demonstrated resilience of economic growth to external shocks, a healthier banking system capable of withstanding stress, and presence of policy buffers and tools that address financial vulnerabilities. The investment grade ratings have positively impacted foreign investors' confidence to invest in bonds issued by the Indonesian companies.

Global USD-denominated bond issuances from high yield and cross-over corporate in Indonesia increased to USD 4.8bn in 2012 from USD 2.8bn in 2011. ~USD 1.7bn global bonds have been issued so far in 2013 by five Indonesian issuers - Alam Sutera (B1/B/B+) issued USD 235mn 6.95% notes maturing in 2020; Star Energy Geothermal (B2/NR/B+) issued USD 350mn 6.125% noted maturing in 2020; Gajah Tunggal (B2/B+/NR) issued USD 500mn 7.75% notes maturing in 2018; Indika Energy (B1/NR/B+) issued USD 500mn 6.375% 2023 notes; and Lippo Karawaci added USD 130mn to its existing USD 273mn 6.125% 2020 notes. Issuance's from both Gajah Tunggal and Indika Energy received strong investor response, both oversubscribed by more than 5 times. Yields offered on these bonds were one of the most attractive in the Asian high yield non-property sector.

Global bond issuance pipeline from Indonesia for 2013 is also building up. PT Tower Bersama Tbk (Ba2/NR/BB) is marketing USD-denominated bonds that are expected to be priced based on market conditions in the coming weeks. Indonesian real estate player, Modernland Realty PT (NR/NR/NR), also announced its intentions to issue USD-denominated global bonds in 2Q 2013 to fund its property acquisitions.

Global investors are increasingly looking to diversify their portfolio to non-China property related issuers, who have dominated the Asian high yield bond issuance market. This trend is also a positive factor for the Indonesian corporate bond issuers. The China property sector has issued more than USD 6bn in just a month in 2013 offering attractive yields for fixed income investors.