International Bond Market: What Are Indonesia's Komodo Bonds?
Earlier this week Indonesian state-controlled construction company Wijaya Karya listed its 'komodo bonds' on the London Stock Exchange in the United Kingdom, an event that was witnessed by Indonesian Finance Minister Sri Mulyani Indrawati. But Wijaya Karya was not the first company to issue komodo bonds. On 13 December 2017 toll road company Jasa Marga sold IDR 4 trillion (approx. USD $298 million) in three-year bonds (priced at 7.5 percent).
First, back to the basics: what is a komodo bond? The komodo bond is a rupiah-denominated bond sold on the international market. It is named after the giant lizard that is native to several islands in the eastern part of Indonesia. Reportedly, it was Indonesian President Joko Widodo himself who selected this name (previously this type of bond was known as nasi goreng bond, named after the famous Indonesian fried rice dish).
Secondly, why do Indonesian corporations feel the need to sell global rupiah-denominated bonds instead of (1) rupiah bonds at home or (2) US dollar bonds on the international market?
There are two main reasons. Firstly, Indonesian companies started to detect limited demand for rupiah-denominated bonds on the domestic market, hence they started to seek global bonds to generate new funds for business expansion (as an alternative to bank loans, IPOs, rights issues, etc.). Secondly, when Indonesian companies issue US dollar-denominated bonds on the global market, they have to face a currency risk (in times of significant rupiah depreciation, their financial burden grows). The rupiah-denominated global bond, on the contrary, puts the currency risk at the side of the investor. In other words, investors in komodo bonds should have great confidence in the performance of the rupiah (and thus in the whole macro-economy of Indonesia) because if the rupiah depreciates, then investors' profit is curtailed.
It is also key that the komodo bonds are issued by strong Indonesian companies that obtained positive credit ratings from the key credit rating agencies. If not, it may be difficult for investors to sell the bonds (liquidity risk). Therefore it is no surprise that both Jasa Marga and Wijaya Karya (Wika) are both majority owned by the Indonesian government.
Wika collected IDR 5.4 trillion (approx. USD $403 million) through the issuance of komodo bonds on the London Stock Exchange, a success (in fact it was 2.5 times oversubscribed). Similarly, for Jasa Marga's IDR 4 trillion komodo bonds, demand had in fact reached IDR 15 trillion. This reflects the high degree of investor confidence in the economy of Indonesia as well as in the fundamentals of these two companies.
It is also interesting to note that these two Indonesian companies were not the first companies to sell rupiah-denominated debt on the London Stock Exchange. Earlier, the London-headquartered European Bank for Reconstruction & Development had issued IDR 1 trillion in rupiah bonds in London (in 2015). Other examples are the Washington-based Inter-American Development Bank, Barclays, and HSBC. Currently, a total of 16 rupiah-denominated bonds are listed in London.
Seeing the success of Jasa Marga and Wika, several other Indonesian companies are interested to sell komodo bonds. These companies include Waskita Karya, Perusahaan Listrik Negara (PLN), Telekomunikasi Indonesia, and Hutama Karya. All these companies have in common that they are partly, or fully, owned by the Indonesian government (and therefore unlikely to collapse).
Meanwhile, the coupon rates for Jasa Marga and Wika's komodo bonds are relatively high at 7.5 percent and 7.7 percent, respectively. When Indonesian companies sell US dollar-denominated debt, the coupon is usually set below 7 percent. The higher coupon for komodo bonds is to entice investors amid the currency risk.
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