market indonesia · for the understanding of indonesia’s corporate bond market, available data...

INDONESIACORPORATE BOND MARKET REPORT

Contents 1. Overview of Indonesia’s Corporate Bond Market ..................................................................................................................... 9

1.1. Overall Characteristics .............................................................................................................................................................. 9

1.2. Corporate Bond Market Size ................................................................................................................................................... 9

2. Characteristics of Indonesia Corporate Bonds ......................................................................................................................... 11

2.1. Issue Size ...................................................................................................................................................................................... 11

2.2. Maturity Distribution ............................................................................................................................................................... 11

2.3. Maturity Type ............................................................................................................................................................................. 12

2.4. Coupon Type .............................................................................................................................................................................. 13

2.5. Payment Rank ............................................................................................................................................................................ 14

2.6. Credit Ratings ............................................................................................................................................................................. 14

3. Investors .................................................................................................................................................................................................. 15

3.1. Mutual Funds .............................................................................................................................................................................. 17

3.2. Pension Funds ............................................................................................................................................................................ 19

3.3. Insurance Companies .............................................................................................................................................................. 22

3.4. Local Banks .................................................................................................................................................................................. 24

3.5. Other Investors .......................................................................................................................................................................... 25

4. Other Market Participants ................................................................................................................................................................ 26

4.1. Issuers ............................................................................................................................................................................................ 26

4.2. Credit Rating Agencies ........................................................................................................................................................... 27

4.3. Bond Pricing Agency ............................................................................................................................................................... 28

4.4. Regulatory Authorities ............................................................................................................................................................ 28

5. Credit Spreads ....................................................................................................................................................................................... 29

6. Komodo Bonds ..................................................................................................................................................................................... 30

7. Guaranteed Corporate Bonds ......................................................................................................................................................... 31

7.1. IDR Guaranteed Bonds............................................................................................................................................................ 32

7.2. Foreign Currency Guaranteed Bonds ............................................................................................................................... 34

8. Regulatory Direction .......................................................................................................................................................................... 36

Notes ................................................................................................................................................................................................................... 37

References ......................................................................................................................................................................................................... 38

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Tables

Table 1: Corporate Bond Market, Market Capitalization, and Gross Domestic Product of ASEAN6+3, 2018 ............... 9

Table 2: Corporate Bond Market, Government Bond Market, and Corporate Loan Market of ASEAN6+3, 2018 ..... 10

Table 3: Outstanding Indonesian Debt Instruments According to Year of Maturity, as Registered in KSEI, as of 28 December 2018 ............................................................................................................................................................................................... 11

Table 4: Comparison of Local Currency Issue Sizes Across ASEAN6 countries (USD million, 2018) ............................... 11

Table 5: Breakdown of Corporate Bonds in Terms of Maturity Distribution Among ASEAN6, 2018 ............................. 12

Table 6: Number of Indonesia Corporate Bonds Depending on Maturity Distribution and Industry, 2018 ............... 12

Table 7: Breakdown of Corporate Bonds in Terms of Maturity Type Among ASEAN6 (%) ................................................ 13

Table 8: Number of Indonesia Corporate Bonds Depending on Maturity Type and Industry, 2018 ............................. 13

Table 9: Breakdown of Corporate Bonds in Terms of Coupon Type Among ASEAN6 (%) ................................................. 13

Table 10: Breakdown of Corporate Bonds in Terms of Payment Rank Among ASEAN6 (%)............................................. 14

Table 11: Number of Indonesia Corporate Bonds Depending on Payment Rank and Industry, 2018 .......................... 14

Table 12: Breakdown of Corporate Bonds in Terms of Credit Rating Among ASEAN6 (%) ............................................... 15

Table 13: Breakdown of Ownership of IDR Corporate Bonds, 2013-2018 (IDR trillion) ...................................................... 16

Table 14: Summary of Investment Appetite Survey Among Investor Groups for Corporate Bonds ............................. 16

Table 15: Investment Restrictions and Limitations for Mutual Fund in KIK Form ................................................................. 18

Table 16: Overview of Pension Funds in Indonesia, December 2018 ........................................................................................ 20

Table 17: Investment Restrictions or Limitations for Pension Funds ......................................................................................... 21

Table 18: Investment Restrictions or Limitations for Private Insurance Companies ............................................................ 23

Table 19: Summary of General Investment Criteria for Corporate Bonds ................................................................................ 24

Table 20: Commercial Banks Securities Investments (IDR trillion) .............................................................................................. 24

Table 21: Breakdown of Foreign Ownership of IDR Corporate Bonds, 2013–2018 (IDR trillion) ..................................... 26

Table 22: Number of Issuers and Issues Listed in Indonesia Stock Exchange, According to Credit Ratings .............. 27

Table 23: IDR Corporate Bond Yield Matrix, 20 December 2018 (%) .......................................................................................... 29

Table 24: IDR Credit Spread Matrix, 20 December 2018 (%) .......................................................................................................... 29

Table 25: THB and MYR Credit Spread Matrix, 20 December 2018 (%) ..................................................................................... 30

Table 26: List of Komodo Bonds from Indonesian Companies ..................................................................................................... 30

Table 27: Local Currency Guaranteed Bonds in ASEAN6 Countries (USD millions) .............................................................. 31

Table 28: Information on IDR-Denominated Guaranteed Corporate Bonds in Indonesia ................................................. 32

Table 29: Details on a Hutama Karya’s Guaranteed Bond .............................................................................................................. 33

Table 30: Details on PT Ciputra Residence’s Guaranteed Bonds.................................................................................................. 33

Table 31: Details on MPMF’s Guaranteed Bonds................................................................................................................................ 34

Table 32: List of Foreign Currency Guaranteed Bonds Issued by Indonesian Companies ................................................ 34

Table 33: Details on Gajah Tunggal’s Guaranteed Bond ................................................................................................................. 35

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Table 34: Details on Chandra Asri Petrochemical’s Guaranteed Bonds .................................................................................... 35

Table 35: Details on Japfa Comfeed Indonesia’s Guaranteed Bonds ......................................................................................... 35

Table 36: Details on Protelindo’s Guaranteed Bond ......................................................................................................................... 36

Figures

Figure 1: Ownership of IDR Corporate Bonds as Recorded in KSEI, by Broad Investor Groups, ............................................................. 15

Figure 2: Securities Composition of Mutual Funds (29 December 2017) ...................................................................................................... 18

Figure 3: Investment Portfolio of Pension Funds, December 2018 (IDR trillion) ......................................................................................... 20

Figure 4: Investment Portfolio of Insurance Industry, 2018 (IDR trillion)....................................................................................................... 22

Figure 5: Issuers According to Sector ....................................................................................................................................................................... 26

Figure 6: State-owned Enterprise as Major Issuer Group ................................................................................................................................... 27

Figure 7: Guaranteed Corporate Bond Market in Indonesia, 2018 .................................................................................................................. 32

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Abbreviations

ABS asset-backed securities ADB Asian Development Bank ASEAN Association of Southeast Asian Nations ASEAN+3 ASEAN + Japan, Korea, and People’s Republic of China CAD Canadian dollar CCS cross currency swap CDS credit default swap CGIF Credit Guarantee and Investment Facility CLN credit-linked note CPF Capital-Protected Fund DBPF Defined Benefit Pension Fund DCPF Defined Contribution Pension Fund EBA-SP Efek Beragun Aset berbentuk Surat Partisipasi

(Asset Backed Securities – Participation Certificate) EPF Employee Pension Fund EUR Euro FCY foreign currency FIPF Financial Institution Pension Fund GBP British pound GDP gross domestic product IDR Indonesian rupiah IDX Indonesia Stock Exchange IFC International Finance Corporation KIK-EBA Kontrak Investasi Kolektif – Efek Beragun Aset (Collective Investment – Contract Asset Backed Securities) KSEI PT Kustodian Sentral Efek Indonesia (Central Securities Depository) IBPA Indonesia Bond Pricing Agency IDR Indonesian rupiah IDX Indonesia Stock Exchange IGB Indonesia Government Bonds ILIP Investment-Linked Insurance Product IMF International Monetary Fund IRS interest rate swap JIBOR Jakarta Inter-Bank Offer Rate JPY Japan yen LCY local currency LSE London Stock Exchange MTN medium-term note MYR Malaysian ringgit NAV net asset value NCD negotiable certificate of deposit OJK Otoritas Jasa Keaungan PEFINDO PT Pemeringkat Efek Indonesia PLN Perusahaan Listrik Negara PT Perseroan Terbatas (PT, a limited liability company) REIT Real Estate Investment Trust REPO repurchase agreement SGD Singapore dollar SGX Singapore Stock Exchange SOE state-owned enterprise SMF PT Sarana Multigriya Finansial

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SNP PT Sunprima Nusantara Pembiayaan THB Thailand baht USD United States dollar

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Disclaimer

The views expressed in this report are those of the authors and do not necessarily reflect the views and policies of Credit Guarantee and Investment Facility, a trust fund of the Asian Development Bank (CGIF) or its Board of Directors or the governments they represent.

This report is provided solely for informational purposes, and is not to be construed as providing advice, recommendations, endorsements, representations or warranties of any kind or whatsoever. The mention of specific companies or organizations, products or services does not imply that they are endorsed or recommended by CGIF in preference to others of similar nature that are not mentioned. No legal responsibility can be accepted by CGIF or the individual authors for the information in this report.

While every effort has been taken to ensure the accuracy of the information, CGIF shall have no liability for any loss or damage arising directly or indirectly from the use of information in this report.

Reproduction in full or in part use for any public purpose is permitted only with the prior written approval of CGIF.

This paper is part of the ASEAN corporate bond market research under the Finance Department of CGIF. As led by Dong Woo Rhee, Chief Financial Officer of CGIF, with assistance from Soleil Corpuz, Research Analyst of CGIF, this research effort aims to show the characteristics of corporate bond markets in ASEAN region. For any questions or comments on the contents of this report, please contact [email protected].

mailto:[email protected]

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Data Description

For the understanding of Indonesia’s corporate bond market, available data from the KSEI, OJK and the IDX were investigated. Data on corporate bonds as of 31 December 2018 from Bloomberg LP and those listed at IDX were also investigated for the analysis of specific characteristics of corporate bonds. All data sources were cited in each table or figure presented in this report.

A total of 990 IDR onshore bonds were collected from Bloomberg LP and IDX. In Chapter 1, data from Bloomberg LP were used when comparing to ASEAN countries; while data from IDX (listed bonds) were used to form industry-level analysis (691 IDR onshore bonds).

The data analyses were supplemented by qualitative information from market players. CGIF conducted face-to-face interviews with market players on 17–20 September 2018 and 12–15 November 2018.

Corporate bonds are defined as the bonds issued by both private and public companies, including financial institutions. For this report, the bonds issued by domestic entities are only included for the understanding of the IDR corporate bond market. IDR bonds issued by foreign entities are treated separately as cross-border issuances.

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Summary

Chapter 1: Overview of Indonesia’s Corporate Bond Market

1) Indonesia’s corporate bond market is one of the smallest markets in ASEAN+3 countries. As of December 2018, based on available data from Bloomberg, Indonesia’s corporate bond market reached approximately IDR441 trillion, which was ~3% of its GDP. Indonesia followed the relative size of corporate bond market to GDP of the Philippines (at ~8% of GDP) and fell behind those of Thailand (~21% of GDP) and Malaysia (~46% of GDP).

Chapter 2: Characteristics of Indonesia’s Corporate Bond Market

2) In terms of method of issuance, the size of corporate bonds issued under private placement is still unknown and these are not reflected in the figure mentioned above. Types of securities that are offered under a private placement scheme include medium-term note (MTN), negotiable certificate of deposit (NCD), and promissory notes. MTNs issued under the private placement method can be considered as part of corporate bonds. With this, MTNs are defined as those bonds sold to less than 50 investors, with shorter tenors.

3) Although the exact figure has yet to be identified, market participants noted that based on their experience and observations, the total private placement market is smaller than the publicly offered corporate bond market.

4) Based on the available data from Indonesia Stock Exchange (IDX) and Bloomberg, it is seen that Indonesia’s corporate bond market strongly leans toward a plain vanilla structure, wherein straight and fixed coupon type bonds are dominating.

Chapter 3: Investors

5) In 2018, about 93% of corporate bonds were held by local investors, while 7% were held by foreign investors. Major local investor groups in Indonesia consist of mutual funds, pension funds, local banks, and insurance companies. The top local investor group, the mutual funds, held 26% of the total IDR corporate bonds in 2018. A contributing reason for this is the favorable tax rates on interest gained from investments through mutual funds. For mutual funds, it is only 5%, which is significantly lower compared to the 15% for pension funds and insurance companies.

6) In terms of tenors, local investors lean towards shorter term bonds (usually 5 years and below). Investors achieve duration from government bonds and are cautious about investing in longer tenor corporate bonds.

7) By market practice, local investors are comfortable in investing in A-rated bonds at minimum, although the current regulations allow them to invest to as low as the minimum investment grade (which is considered as BBB- by market participants).

8) While having no specific investment criteria with respect to guarantees in corporate bonds, local investors are aware of the effect of guarantees in credit ratings of the bonds.

Chapter 4: Other Market Participants

9) In 2018, about 46% of the total value of outstanding corporate bonds in Indonesia came from bonds issued by state-owned enterprises (SOEs), which make them the major issuer group in the country.

10) Indonesia has two credit rating agencies – PT Pemeringkak Efek Indonesia (PEFINDO) and Fitch National Rating. Both Fitch National and PEFINDO (a local credit rating agency) have developed a partial guarantee methodology for corporate bonds. In addition, Indonesia has one bond pricing agency called the Indonesia Bond Pricing Agency, which has already priced 98.45% of public offered corporate bonds.

Chapter 5: Credit Spreads

11) There are two observations noted from the corporate bond yields and credit spreads in Indonesia. First, credit spread of AAA-rated bond is relatively stable through different maturities. Investors seem to be comfortable in investing on AAA-rated bonds even if it has a longer tenor. Second, there are significant gaps on credit

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spreads between high-grade and low-grade bonds (0.44% gap from AAA to AA; 1.17% from AA to A; and, 2.07% from A to BBB). This seem to indicate that investors demand greater spreads in lower-grade bonds.

Chapter 6: Komodo Bonds

12) Komodo bonds (i.e., IDR bonds but settled in major currency, which may be used for infrastructure projects in Indonesia) were introduced in December 2017. The first Komodo bond was from Jasa Marga, a toll road management and construction SOE. The Komodo bond of Jasa Marga had an issue amount of IDR4 trillion, and the target of which were foreign investors. It was oversubscribed four times, which indicated a strong investor appetite at that time.

13) Further issuances of Komodo bonds were curtailed by recent depreciation of the Indonesian rupiah. As such, foreign investors became wary in investing in Komodo bonds since they would shoulder the currency risk.

Chapter 7: Guaranteed Corporate Bonds

14) Credit guarantees for corporate bonds have yet to become popular in Indonesia. Based on available data in 2018, 15 bonds issued by Indonesian entities were guaranteed, wherein five were foreign currency (FCY)-denominated bonds. Out of these, CGIF was the guarantor of four bonds (2 IDR bonds and 2 FCY bonds).

15) The SOEs benefit from their status when issuing bonds. Majority of local investors perceive that SOEs are more stable (or less risky) than private companies and has an “implicit guarantee from the government”, which makes local investors to have strong preference for SOE bonds. In a way, this may hamper the development of Indonesia’s corporate bond market since private companies are challenged to establish their creditworthiness as bond issuers.

Chapter 8: Regulatory Direction

16) The OJK is drafting new regulations to support the development of Indonesia’s corporate bond market. One of these include regulations for MTN, which may be due to the default of one issuer in their payments.

17) Asset-backed security is another product which OJK considers to develop in the future. Other types of eligible assets are being explored as Kontrak Investasi Kolektif – Efek Beragun Aset (KIK-EBA, “Collective Investment – Contract Asset Backed Securities”), such as auto loans or MTNs.

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1. Overview of Indonesia’s Corporate Bond Market

1.1. Overall Characteristics

Indonesia’s corporate bond market is one of the smallest markets in ASEAN+3 countries.1 Most corporate bonds are issued with maturities of up to 5 years. Indonesian market prefers plain, vanilla type in terms of structure. Coupons are mostly fixed; and callable or other option embedded bonds are rare.

Recent developments are also expected to boost local currency (LCY) bond issuance. Indonesia witnessed the introduction of Komodo bonds (IDR-denominated bonds, settled in USD) from Jasa Marga Persero for its toll road project in December 2017, and from Wijaya Karya Persero for its infrastructure projects in January 2018. Both bonds are listed at the London Stock Exchange (LSE) and Singapore Stock Exchange (SGX) and aimed to attract foreign investors.

1.2. Corporate Bond Market Size

Table 1 shows the comparison of LCY corporate bond markets in ASEAN6+3 countries. Out of the ASEAN countries, four countries (Brunei, Cambodia, Lao PDR, and Myanmar) are excluded because they do not have corporate bond markets as of 31 December 2018. Among the ASEAN6+32, Indonesia is the second smallest next to Viet Nam not only in terms of absolute corporate bond market size, but also in terms of relative corporate bond market size, which takes into account the economic scales of countries.

Table 1: Corporate Bond Market, Market Capitalization, and Gross Domestic Product of ASEAN6+3, 2018

Country LCY Corporate

Bond Market (A)

Market Capitalization

(B)

GDP (C)

A/B (%)

A/C (%)

Indonesia 28.62 438 1,031.09 6.5 2.8 Viet Nam 4.29 171 238.85 2.5 1.8 Philippines 25.01 253 331.51 9.9 7.6 Thailand 107.00 495 504.73 21.6 21.2 Malaysia 160.19 392 345.92 40.9 46.3 Singapore 116.15 483 357.39 24.0 32.5 People’s Republic of China 2,615.42 5,377 13,088.75 48.6 19.9 Japan 723.62 5,373 5,004.14 12.8 14.5 South Korea 1,191.26 1,377 1,604.27 84.4 74.3

LCY = local currency, GDP = gross domestic product Note: Values in USD billions. Sources: Asian Bonds Online for corporate bond market size and GDP (as of December 2018); Market capitalization in domestic exchanges (in current values, as of 2018) from Bloomberg.3

1 The data for Indonesia does not include medium-term notes (MTNs), which is one form of private placement. See section 1.3 (Specific Characteristics) for details on MTN. ASEAN+3 include, in addition to ASEAN member states, People’s Republic of China, Japan, and Republic of Korea. 2 In this report, “ASEAN6+3” countries refer to Indonesia, Viet Nam, Philippines, Thailand, Malaysia, Singapore, People’s Republic of China, Japan and South Korea. 3 Bloomberg’s estimates on market capitalization are calculated from all shares outstanding in a country’s exchange(s). These do not include exchange traded funds (ETFS) & American Depositary Receipts (ADRs) as they do not directly represent companies. Estimates include only actively traded, primary securities on the country’s exchange(s) to avoid double counting. Bloomberg’s estimates may deem lower than those reported in other sources.

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Table 2 shows the relative size of corporate bond market across ASEAN6+3 countries in comparison with its government bond market size and corporate loan market size.

Table 2: Corporate Bond Market, Government Bond Market, and Corporate Loan Market of ASEAN6+3, 2018

Country LCY Corporate

Bond Market (A)

Government Bond Market

(B)

Corporate Loan Market

(C)

A/B (%)

A/C (%)

Indonesia 28.62 164.59 211.89 17.4 13.5 Viet Nam 4.29 46.65 N/A 9.2 Philippines 25.01 91.01 139.70 27.5 17.9 Thailand 107.00 170.41 486.30 62.8 22.0 Malaysia 160.26 174.08 400.62 92.1 40.0 Singapore 116.15 91.64 295.55 126.7 39.3 People’s Republic of China

2,615.42 6,837.08 12,930.28 38.3 20.2

Japan 688.20 9,545.11 17,749.12 7.2 3.9 South Korea 1,167.93 679.36 710.97 171.9 164.3

LCY = local currency Note: Values are in USD billions. Sources: Asian Bonds Online for corporate bond market size and government bond market size (as of December 2018); Corporate loan market size (as of December 2018) from the central bank of each country.

Indonesia is the country where the relative size of corporate bond market to government bond market is among the smallest among ASEAN6+3. In addition, Indonesia is shown to be one of the countries where companies strongly prefer bank loans to bond issuances when funding is required. Tables 1 and 2 imply that Indonesia’s corporate bond market is neither active nor well developed.

Aside from corporate bonds, other debt instruments in Indonesia include medium-term notes (MTN), negotiable certificate of deposit (NCD), and promissory notes. Among these debt instruments, an alternative to a public offering of a bond is to issue an MTN.4 MTNs may provide an avenue for issuers with lower credit ratings to tap the Indonesian debt market.

Being the depository institution in Indonesia, PT Kustodian Sentral Efek Indonesia (KSEI, “Central Securities Depository”) has data on publicly offered debt instruments, and to some extent, privately offered debt instruments. Registration of debt securities is mandatory for public offers. On the other hand, it is optional for private offers. Table 3 shows the scope of debt instruments in Indonesia, as of 28 December 2018.

4 The Law on Capital Market of Indonesia states that public offers refer to offering of securities to more than 100 persons, resulting to sales to more than 50 persons.

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Table 3: Outstanding Indonesian Debt Instruments According to Year of Maturity, as Registered in KSEI, as of 28 December 2018

Year of Maturity Type of Security 2019 2020 2021 2022 2023 > 2024 Total IDR-denominated (in trillions) Corporate Bonds 86.98 73.72 74.58 52.73 56.52 76.62 421.15 MTN 14.38 26.77 16.98 1.95 1.59 61.67 NCD 14.36 0.38 0.11 14.83 Promissory Notes 0.00 USD-denominated (in millions) Corporate Bonds 47.50 47.50 MTN 617.26 81.50 142.15 18.00 858.91

KSEI = PT Kustodian Sentral Efek Indonesia (Central Securities Depository), MTN = medium-term note, NCD = negotiable certificate of deposit Note: Number may not add to total due to rounding off. Source: KSEI (Master Securities File, as of 28 December 2018).

2. Characteristics of Indonesia Corporate Bonds

2.1. Issue Size

Average issue size of IDR corporate bonds outstanding as of December 2018 was equivalent to USD36.9 million, the smallest among ASEAN 6 5 . Small average issue size doesn’t always mean undeveloped market because companies can tap bond market even if issue amount is small. However, small average issue size of domestic corporate bond market can lead companies to tap offshore bond markets when their funding amounts are too big for their domestic market to accommodate.

Table 4: Comparison of Local Currency Issue Sizes Across ASEAN6 countries (USD million, 2018)

Country Average Issue Size Minimum Issue Size Maximum Issue Size Indonesia 36.9 0.08 634.9 Viet Nam 56.7 0.09 414.3 Malaysia 60.5 0.02 1,750.0 Singapore 156.4 0.25 740.6 Thailand 61.7 0.14 1,360.0 Philippines 122.5 1.87 548.7

Source: Bloomberg. (Data as of 31 December 2018.)

2.2. Maturity Distribution

Maturity distribution was investigated with the original maturities of total corporate bonds outstanding as of end 2018. Not only Indonesia but also peer countries were investigated to understand how unique or different maturity distribution of Indonesia corporate bonds is in comparison with other countries. Table 5 shows that about 78% of Indonesia’s corporate bonds were issued with maturities of 5 years or less. Also, longer than 10-year bonds were rare in Indonesia as only 3% of corporate bonds were issued with longer than 10-year maturities. Because more weight was given on shorter tenors and less on longer tenors, value-weighted average maturity of corporate bonds of Indonesia was 4.6 years, the shortest among ASEAN 6.

5 “ASEAN 6” refers to Indonesia, Viet Nam, Malaysia, Singapore, Thailand, and Philippines.

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Table 5: Breakdown of Corporate Bonds in Terms of Maturity Distribution Among ASEAN6, 2018

Country Up to 3 years

>3 to 5 years

>5 to 10 years >10 years Perpetual Average Maturity (Y)

Indonesia 50% 28% 19% 3% 4.6 Viet Nam 46% 26% 22% 6% 5.1 Malaysia 11% 17% 35% 35% 2% 9.7 Singapore 11% 23% 46% 8% 12% 7.4 Thailand 39% 28% 25% 6% 1% 5.3 Philippines 6% 4% 79% 10% 7.5

Y = year

Notes: 1. Ranges include long-end tenors and excludes short-end tenors. For example, tenors of 3–5 years include 5-year bonds but does not include 3-year bonds. 2. Data refers to original maturity. 3. Numbers may not add up to 100% due to rounding off. Source: Bloomberg.

High concentration on 5-year or less maturities is mainly attributed to financial companies, most of which run auto finance businesses. They are the second biggest issuer group next to state-owned enterprises (SOEs) in Indonesia and rarely issue bonds longer than 5 years because the average maturity of their assets, auto loans, is not so long.

Table 6: Number of Indonesia Corporate Bonds Depending on Maturity Distribution and Industry, 2018

Sector Up to 3Y >3 to 5Y >5 to 10Y Over

10Y Total

Banks 37 32 42 1 112 Basic Industry and Chemicals 11 11 2 24 Consumer Goods 1 8 3 12 Finance 88 43 2 133 SOE 60 77 78 20 235 Infrastructure, Utilities, and Transportation 24 26 41 5 96 Mining 13 12 2 27 Plantation 1 1 2 Property, Real Estate, and Building Construction

5 14 3 22

Trade, Services, and Investment 11 11 6 28 Total 250 235 180 26 691

SOE = state-owned enterprise, Y = year Source: Data from Indonesia Stock Exchange (IDX).

Moreover, current appetite of local investors in Indonesia for corporate bonds is short-term. The market for 3- to 5-year corporate bonds is now building up, especially from pension funds and insurance companies. This trend is considered as a positive development to encourage longer term issuances in the future.

2.3. Maturity Type

Maturity type classifies bonds into straight bonds, callable bonds, sinkable bonds, convertible bonds, and others. Straight bond is the plain, vanilla structure which pays principal only at maturity without any option for early redemption or extension. Callable bond is a type of bond that allows the issuer of the bond to retain the option of redeeming the bond before maturity. Sinkable bond pays principal based on its amortization schedule. Though straight bonds are most common in most countries, callable bonds occupy a significant share of corporate bond markets in most countries. However, Table 7 shows that straight bonds were extremely dominant in Indonesia.

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Table 7: Breakdown of Corporate Bonds in Terms of Maturity Type Among ASEAN6 (%)

Country Straight Callable Sinkable Convertible Others Indonesia 98 1 0.3 0.2 Viet Nam 82 8 10 Malaysia 90 5 0.3 3 3 Singapore 77 8 0.6 15 Thailand 82 15 1 0.1 2 Philippines 38 58 2 2

Note: Numbers may not add up to 100% due to rounding off. Source: Bloomberg.

Out of 691 corporate bonds available from IDX as of end 2018, only three bonds were non-straight bonds, which were all sinkable bonds, as shown in Table 8.

Table 8: Number of Indonesia Corporate Bonds Depending on Maturity Type and Industry, 2018

Sector Straight Callable Sinkable Total Banks 112 112 Basic Industry and Chemicals 24 24 Consumer Goods 12 12 Finance 133 133 SOE 235 235 Infrastructure, Utilities, and Transportation 93 3 96 Mining 27 27 Plantation 2 2 Property, Real Estate, and Building Construction 22 22 Trade, Services, and Investment 28 28 Total 688 0 3 691

SOE = state-owned enterprise Note: Information from Bloomberg, KSEI, and IBPA were also used in terms of the descriptions on maturity type of each bond. Source: Indonesia Stock Exchange.

2.4. Coupon Type

Coupon type classifies bonds into fixed coupon bonds, floating coupon bonds and so on. Table 9 shows that fixed coupon bonds are dominant in ASEAN 6 countries, with Indonesia having the highest ratio. Together with the maturity type observation, coupon type observation confirms that Indonesia corporate bond market participants strongly prefer plain vanilla structure.

Table 9: Breakdown of Corporate Bonds in Terms of Coupon Type Among ASEAN6 (%)

Country Fixed Floating Step-Up Variable Zero Others Indonesia 95 0.3 0.6 0.5 4 Viet Nam 43 36 3 15 3 Malaysia 76 12 3 2 7 0.3 Singapore 82 1 2 13 1 Thailand 90 1 8 0.1

Philippines 92 1 1 4 2


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2.5. Payment Rank

Corporate bonds can be classified as secured bond, unsecured bond, or subordinated bond depending on payment rank. As “unsecured” is one of the characteristics of bond compared with bank loan, unsecured bond is generally the most common among the corporate bonds. However, Table 10 shows that Indonesia is one of the two countries in ASEAN6 where secured bonds occupy a significant share of the corporate bond market.

Table 10: Breakdown of Corporate Bonds in Terms of Payment Rank Among ASEAN6 (%)

Country Secured Unsecured Subordinated Indonesia 21 74 5 Viet Nam 6 93 1 Malaysia 52 41 6 Singapore 3 84 12 Thailand 3 94 3 Philippines 5 86 9


Table 11 shows that significant percentage of secured bonds in Indonesia is attributed to financial companies. They issue corporate bonds substantially, most of which are secured bonds. It is well known that financial companies in Indonesia generally provide receivables as security when they issue bonds.

Table 11: Number of Indonesia Corporate Bonds Depending on Payment Rank and Industry, 2018

Sector Secured Unsecured Subordinated Banks 1 70 40 Basic Industry and Chemicals 18 6 Consumer Goods 4 8 Finance 118 14 SOE 12 223 Infrastructure, Utilities, and Transportation 2 90 Mining 22 Plantation 1 Property, Real Estate, and Building Construction 17 5 Trade, Services, and Investment 8 19 Total 180 458 40

SOE = state-owned enterprise Notes: Information from Bloomberg were also used in terms of the descriptions on payment of each bond. However, there were 13 bonds that do not have available information on their respective payment ranks (even in KSEI or IBPA websites). As such, only 678 bonds were analyzed. Source: IDX.

2.6. Credit Ratings

Among the IDR corporate bonds whose credit ratings6 were available, 88.2% were rated A or higher. This result implies that BBB or lower-rated companies have difficulty raising funds from bond market in Indonesia. Though Indonesia seemed strict in terms of the accessibility of bond market by low-rated companies, Table 12 shows that Indonesia was at least more generous than the Philippines, where AAA and AA were the lowest ratings widely accepted.

6 Descriptions of credit ratings are found in Appendix 1.

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Table 12: Breakdown of Corporate Bonds in Terms of Credit Rating Among ASEAN6 (%)

Country AAA AA A BBB BB Others Indonesia 46.4 19.0 22.8 6.5 0.4 4.9 Malaysia 25.7 61.9 8.9 0.1 0.0 3.4 Philippines 95.3 4.7 0.0 0.0 0.0 0.0 Singapore 16.5 10.1 32.9 39.2 0.0 1.3 Thailand 6.7 12.3 10.1 10.1 0.9 0.3

Notes: 1. Bonds whose credit ratings were not available were excluded for calculating the percentages. 2. Rating agencies used for each market are PEFINDO for Indonesia, RAM for Malaysia, PhilRatings for the Philippines, Moody’s for Singapore, and TRIS for Thailand. 3. No available data for Viet Nam. Sources: IDX for Indonesia; Bloomberg for other countries (as of 31 December 2018).

3. Investors

Mutual funds were the biggest investor group in Indonesia, owning 26% of total corporate bonds, followed by pension funds, 21%, financial institutions, 20%, and insurance 18%. They were all local investors. Foreign investors only took 7% of total ownership of IDR corporate bonds. Referencing from discussions of market participants in Indonesia, the small share of foreign investors might be due to the following reasons: (i) legal ambiguity for foreign investors to claim their rights on event of default, (ii) high withholding tax rate of 20% for foreign investors, and (iii) lack of trading in the secondary market. Figure 1 shows the ownership of IDR corporate bonds by investor groups as of December 2018.

Figure 1: Ownership of IDR Corporate Bonds as Recorded in KSEI, by Broad Investor Groups, as of December 2018

Source: Otoritas Jasa Keaungan (OJK) Monthly Statistics (4th Week, December 2018).

One possible reason for high share of mutual funds in terms of bond ownership is the favorable tax rate on interest gained from investments. For mutual funds, it is only 5%, which is significantly lower compared to the 15% for pension funds and insurance companies.7 This incentive was supposed to end in 2017. However, the government

7 The Direktorat Jenderal Pajak (Directorate General of Taxes of Indonesia) imposes 15% tax rate on interest on bonds other than that payable to banks operating in Indonesia and government-approved pension funds.

Mutual Fund26%

Pension Fund21%

Financial Institution20%

Insurance18%

Other local investors8%

Foreign investors7%

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decided to extend this benefit on mutual funds until 2020. After 2020, the tax rate of 5% for mutual funds will be increased to 10%. Table 13 shows its rapid growth since 2014 when the tax incentive was provided for mutual funds. In this sense, once the new tax rate becomes effective, it will likely affect the market share of mutual funds negatively.

Table 13: Breakdown of Ownership of IDR Corporate Bonds, 2013-2018 (IDR trillion)

2013 2014 2015 2016 2017 2018 Mutual Fund 38 41 53 78 105 103 Pension Fund 62 61 69 71 84 82 Financial Institution 41 41 46 59 72 81 Insurance 34 34 37 54 65 73 Other Local Investor 23 20 19 21 25 33 Foreign Investor 14 21 19 19 31 29 Total 212 217 243 302 382 401

Source: OJK (as compiled through Capital Market Monthly Statistics, every 4th week of December, 2013–2018).

Table 14 summarizes the general investment appetites for corporate bond of investor groups.8

Table 14: Summary of Investment Appetite Survey Among Investor Groups for Corporate Bonds

Mutual Funds Pension Funds Local Banks Life Insurance General Insurance

Tenor 3 years 3–5 years 1–3 years 3–5 years 3–5 years Issuer SOE SOE SOE SOE SOE

Currency a IDR and USD IDR IDR and USD IDR and USD IDR and USD Credit Rating A A A A A

IDR = Indonesian rupiah, SOE = state-owned enterprise, USD = United States dollar a Mutual funds, life insurance and general insurance companies have very small investments in USD bonds. For mutual funds and life insurance companies, their USD investments are used for their USD bond fund and USD investment-linked insurance product, respectively. Source: Interviews with institutional investors (November 2018).

All investors prefer SOE-issued bonds (SOE bonds) because they believe SOEs are safer than private companies due to the implicit guarantee from the government that an SOE may get. Investors commonly commented that single A is the minimum credit rating investable even if OJK allows them to invest as low as BBB-. This seems to indicate that investors may want to have some buffers to absorb a few notches’ downgrades of the bonds they hold, especially for non-investment grade bonds, because of the market’s illiquidity. Maturity appetite on corporate bonds is generally not long across investors. Though insurances and pension funds show appetite for longer tenor than other investor groups, they seem to achieve duration from government bonds and are cautious about long-tenor corporate bonds. Finally, Indonesian investors barely invest in foreign currency (FCY)-denominated bonds. None of the investors interviewed mentioned that they invested in USD bonds to achieve duration or higher IDR yields after swap. Some of them are investing in USD bonds because they have USD products sold to their clients. However, the USD bonds they do have seem to be negligible in their total portfolios. More details of the investment appetites by each investor group are explained in the sub-chapters.

The OJK passed POJK No. 11/2018, Tentang Penawaran Umum Efek Bersifat Utang Dan/Atau Sukuk Kepada Pemodal Profesional, [Regulation on the Public Offer of Bonds and Sukuk Securities to Professional Investors].7 This

8 Information gathered through market interviews. 7 OJK. 2018. Salinan Peraturan Otoritas Jasa Keuangan Nomor 11/POJK.04/2018 Tentang Penawaran Umum Efek Bersifat Utang Dan/Atau Sukuk Kepada Pemodal Profesional [OJK Regulation No. 11/POJK.04/2018: Regulation on the Public Offer of Bonds and Sukuk Securities to Professional Investors] https://www.ojk.go.id/id/regulasi/Documents/Pages/Penawaran-Umum-Efek-Bersifat-Utang-dan-atau-Sukuk-kepada-Pemodal-Profesional/pojk%2011-2018.pdf

https://www.ojk.go.id/id/regulasi/Documents/Pages/Penawaran-Umum-Efek-Bersifat-Utang-dan-atau-Sukuk-kepada-Pemodal-Profesional/pojk%2011-2018.pdf


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regulation has two objectives: (i) to simplify the issuance process and lessen the cost for issuers, and (ii) to define the professional investors. Under this regulation, issuers have less documents to submit to OJK for issuance to professional investors. If issuers have issued bonds which have not yet matured, then they are exempted from the requirement of submitting audited financial statements and legal opinions to OJK.

The regulation further narrows the definition of professional investors to the following investor groups:

• Financial services institutions, such as banks (commercial banks, Syariah banks, and branch office of a foreign bank), pension funds, insurance companies and reinsurance companies (both conventional and Syariah), investment managers, and securities companies;

• Any legal entity, joint venture, association, or organized group which meets the following criteria: (1) capability to analyze investment risks, (2) has investment experience of 1 year, (3) has net assets of IDR20 billion, or average investment portfolio in capital market of IDR6 billion within 1-year period prior to the public offering; and

• High net worth individuals.

The definition of high net worth individuals as professional investors is described in the “Investors” section of this report. The next sub-chapters provide each industry description, regulations on investments, and investment practices.

3.1. Mutual Funds

Industry Description

Mutual funds can be classified as closed-ended or open-ended mutual funds. Capital Protected Fund (CPF) is the most popular product representing closed-ended mutual funds in Indonesia. CPF protects capital by way of holding bonds until their maturities. Corporate bonds or MTNs are preferred over government bonds as the underlying asset of CPF to achieve higher yields.9

The MTNs were used as one of the underlying assets for CPF, one of the most popular types of mutual fund in Indonesia. CPF is the closed-ended mutual fund which is composed of a single bond or multiple bonds with similar maturities. To protect principal, bonds in the fund are held until their maturities without trading during their lives. Corporate bonds or MTNs are preferred over government bonds for CPF to achieve higher yields. However, OJK has disallowed MTN as an underlying asset for CPF for investor protection after May 2018 when PT Sunprima Nusantara Pembiayaan (SNP) failed to repay its coupon obligation from its MTN issued in 2017. SNP is a financing company, with primary focus on electronics, furniture, and automotive financing.10

On the other hand, open-ended mutual funds or “KIK” has four basic product classes: (i) stock mutual funds, (ii) fixed income funds, (iii) mixed mutual funds, and (iv) money market mutual funds. Each of the product classes has a Shariah variant of the bonds. Based on the mutual fund industry report of PEFINDO in 2016, stock funds take 35% of the mutual fund industry share, while fixed income funds take 21% of the share.11

9 No published data on CPF, which mirrors the paucity of data for MTNs. In addition, private mutual funds tend to invest in one type of asset (e.g., in one MTN issuance, etc.). 10 SNP is under the Columbia Group (“Columbia Cash and Credit”), a retail chain store with installment options for Indonesian customers. Columbia has around 300 stores in Indonesia. 11 PEFINDO. 2016. Asset Management Industry in Rating Perspective. http://www.pefindo.com/index.php/fileman/file/611 (Accessed on 08 November 2018).

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As at 29 December 2017, investments of mutual funds reached IDR447.85 trillion, wherein the top investments were in equities (35%), corporate bonds (24%), government bonds (23%) and time deposit (9%). 12 Other investments include MTNs, promissory notes, cash, ABS, and sukuk, among others.

Figure 2: Securities Composition of Mutual Funds (29 December 2017)

Source: OJK.

Regulations on Investments

The OJK provided the investment guidelines for mutual funds in the form of collective investment contract (KIK), as written in OJK Rule No. 23/POJK.04/2016.12

In terms of investment ratio, the regulation stipulates that 85% of a mutual fund’s net asset value (NAV) should be invested in securities offered in Indonesia or securities offered by overseas but issued by Indonesian entities.13 The remaining 15% is the allowable ratio for investments in securities offered and traded in foreign stock exchanges. Mutual funds can also invest in various types of securities subject to the NAV of the fund, as shown in Table 15.

Table 15: Investment Restrictions and Limitations for Mutual Fund in KIK Form

Type of Investment Restrictions or Limitations

Equities May not own equity securities of more than 5% of the paid-up capital of a company.

Derivatives May not own derivatives that are not transacted at IDX with an exposure value of more than 10% of NAV of the mutual fund.

ABS May not own ABS that have been offered through a public offering for more than 20% of the NAV of the mutual fund. Each series of ABS must not be more than 10% of the NAV of the mutual fund.

12 As of time of writing, 2017 data was the most recent information available from the OJK website. Government bonds are defined as those issued by the Ministry of Finance Indonesia and those issued by SOEs for infrastructure projects in Indonesia (at least 51% owned by the government). 12 OJK. 2016. Salinan Peraturan Otoritas Jasa Keuangan Nomor 23/POJK.04/2016 Tentang Reksa Dana Berbentuk Kontrak Investasi Kolektif [OJK Rule No. 23/POJK.04/2016: Mutual Funds for Collective Investment Contracts (Articles 4 and 5)] https://www.ojk.go.id/id/kanal/syariah/regulasi/peraturan-ojk-terkait-syariah/Documents/Pages/POJK-tentang-Reksa-Dana-Berbentuk-Kontrak-Investasi-Kolektif/POJK%20RDKIK.pdf 13 This includes both public issues and private placements. For private placements, a credit rating on the issue is required.

Equity35%

Corporate Bonds24%

Government Bonds23%

Time Deposit9%

Others9%

https://www.ojk.go.id/id/kanal/syariah/regulasi/peraturan-ojk-terkait-syariah/Documents/Pages/POJK-tentang-Reksa-Dana-Berbentuk-Kontrak-Investasi-Kolektif/POJK%20RDKIK.pdf


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Bonds, fixed income Shariah, REIT participation units that are not offered through a public offering*

May not own bonds, fixed income Shariah, REIT participation units of (i) more than 5% of the NAV of the mutual fund for each issuer, and (ii) in aggregate amount of more than 15% of the NAV of the mutual fund.

REIT participation units offered through a public offering

May not own REIT participation units, in aggregate, of more than 20% of the NAV of the mutual fund.

Securities issued by affiliated parties

May not own securities that are issued by affiliated parties of the investment manager of more than 20% of the NAV of the mutual fund, unless the affiliation results from capital participation of the Indonesian government.

ABS = asset-backed securities, IDX = Indonesia Stock Exchange, NAV = net asset value, REIT = Real Estate Investment Trust * This includes medium-term notes. Source: OJK.

Investment Practices

Asset management companies put emphasis on the type of issuer for corporate bond investments. Known SOEs are preferred due to its market performance and the implicit guarantee from the government. Private companies may be considered based on the internal investment regulations of the asset management companies.

Only up to 3-year bonds are being invested by mutual funds, since these are the most common tenor in the market now. Mutual funds tend to hold the corporate bonds until maturity.

Asset management companies generally demand for IDR bonds. Asset management companies invest in USD bonds when they are offering USD bond funds. However, USD bond funds offered in the market are limited compared to IDR funds.

For mutual funds, asset management companies invest in corporate bonds with credit rating of A and above. The OJK requires bond holdings to have at least the minimum investment grade (BBB-, as accepted in the market). A credit rating of A provides some buffer in case the bonds held are downgraded.

3.2. Pension Funds


Pension funds can be employer pension fund (EPF) or financial institution pension fund (FIPF). The EPF can be further categorized as defined benefit pension fund (DBPF) or defined contribution pension fund (DCPF). Meanwhile, FIPF can only have a defined contribution. The main regulation on pension funds is Law No. 11 of 1992 (Law on Pension Funds), which states that pension fund shall mean a legal entity that manages a program for pension benefits. It should be established apart from any employer or financial institution. As shown in Table 16, EPF-DBPF had the largest asset and investment size among the types of pension funds in December 2018.

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Table 16: Overview of Pension Funds in Indonesia, December 2018

Type of Pension Fund

Number of Pension Fund

Total Assets (IDR trillions)

Total Investments (IDR trillions)

Establisher Investment Manager

EPF-DBPF 164 154.02 147.45 Employers Asset Management

Company EPF-DCPF 44 32.70 32.04 Employers Asset

Management Company

FIPF 24 82.79 81.45 Bank Life Insurance

Bank Life Insurance

Total 232 269.51 260.94

EPF-DBPF = Employee Pension Fund-Defined Benefit Pension Fund, EPF-DCPF = Employee Pension Fund-Defined Contribution Pension Fund, FIPF = Financial Institution Pension Fund Source: OJK.

Generally, time deposits, government bonds and corporate bonds form the key investments of pension funds (collectively, 70% of the total investment portfolio). The FIPF has more investments in time deposits (59% of FIPF’s total investments), and EPF-DBPF has significant investments in government bonds and corporate bonds (total of 52% of EPF-DBPF’s total investments). Figure 3 represents the investment portfolio of pension funds in the country.

Figure 3: Investment Portfolio of Pension Funds, December 2018 (IDR trillion)

C. Bond = corporate bond, EPF-DBPF = Employee Pension Fund-Defined Benefit Pension Fund, EPF-DCPF = Employee Pension Fund-Defined Contribution Pension Fund, FIPF = Financial Institution Pension Fund, G. Bond = government bond Source: OJK


The OJK’s Regulation No. 3 POJK.05/2015 states that pension funds can invest in the assets shown in Table 17 with their respective limits.13

13 OJK. 2015. Salinan Peraturan Otoritas Jasa Keuangan Nomor 3/POJK.05/2015 Tentang Investasi Dana Pensiun [OJK Rule No. 3/POJK.05/2015: Regulations on Pension Fund Investment] https://www.ojk.go.id/id/regulasi/Documents/Pages/POJK-tentang-Investasi-Dana-Pensiun/POJK%203.%20Investasi%20Dana%20Pensiun.pdf

Total, Pension Funds EPF-DBPF EPF-DCPF FIPF

Others 31 24 4 3

Mutual Funds 17 11 2 4

C. Bond 55 38 8 10

Stocks 31 21 7 3

G. Bond 59 38 8 13

Time Deposit 68 16 4 48

0

50

100

150

200

250

300

in ID

R tr

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https://www.ojk.go.id/id/regulasi/Documents/Pages/POJK-tentang-Investasi-Dana-Pensiun/POJK%203.%20Investasi%20Dana%20Pensiun.pdf


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Table 17: Investment Restrictions or Limitations for Pension Funds


Bank deposits and securities issued by Bank Indonesia

Up to 20% of total investment of pension fund per each bank and/or party.

Listed stocks Up to 20% of total investment of pension fund per company.

Government bonds 100% of total investment of pension fund.

MTN 10% of total investment of pension fund. Total investments of a pension fund in MTNs should not exceed 10% of outstanding MTNs. (MTNs should be registered in KSEI, have a monitoring agent, and has at least an investment grade rating by IBPA.)

Direct investments in unlisted limited liability companies

Up to 15% of total investment of pension fund.

Corporate Bonds Up to 20% of total investment of pension fund per issuer. (Corporate bonds should be listed at IDX and should be of investment grade as rated by a securities rating agency licensed by the OJK.)

Mutual Funds – KIK Up to 20% of total investment of pension fund, per mutual fund.

Mutual Funds – Limited Participation

Up to 10% of total investment of pension fund.

ABS in form of KIK Up to 20% of total investment of pension fund per issuer. (ABS should be listed at IDX and should have an investment grade from a securities rating agency licensed by the OJK.)

REPO Up to 2% of total investment of pension fund for each counterparty; and not exceeding 5% of total investment amount of pension fund.

REIT in form of KIK Up to 20% of total investment amount of pension fund. (REIT-KIK should be issued via public offering.)

Land/Buildings Up to 20% of total investment amount.

ABS = asset-backed securities, IBPA = Indonesia Bond Pricing Agency, IDX = Indonesia Stock Exchange, KIK = Kontrak Investasi Kolektif, KSEI = PT Kustodian Sentral Efek Indonesia (Central Securities Depository), MTN = medium-term note(s), OJK = Otoritas Jasa Keaungan, REIT = Real Estate Investment Trust, REPO = repurchase agreement Source: OJK.

Investment practices

The EPF outsources their investment to asset management companies to actively manage their portfolio. In addition, a lot of pension funds have no expertise in managing their assets. Depending on the direction of the pension fund, asset management companies may invest in various asset classes according to different ratios; usually, they invest the funds in equities, government bonds, time deposits, and corporate bonds.

Pension fund companies would communicate with asset management companies their specific preferences in choosing investments.

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3.3. Insurance Companies


Figure 4 shows the distribution of investments among types of insurance companies in Indonesia as of December 2018. Marketable government securities, mutual funds, and stocks took 73% of the total investments of the insurance industry. In terms of specific insurance segment, life insurance companies heavily invested in mutual funds (36% of total investments of life insurance) and stocks (30% of total investments of life insurance). General insurance and reinsurance companies had significant investments in time deposits (36% and 32% of their total investments, respectively).

Figure 4: Investment Portfolio of Insurance Industry, 2018 (IDR trillion)

GOI = Government of Indonesia Source: OJK.


Social insurance should follow the regulation set in Government Regulations of Indonesia (PP55/2015) on Asset Management of Social Security Fund.14 According to the regulation, 100% of its investment fund can be placed in time deposits and government bonds. On the other hand, the maximum placement for corporate bonds, equities, mutual funds, and municipal bonds is 50% of the total investment fund. The same regulation also mentioned that up to 20% of total investment fund can be placed in KIK-EBA and REITs, 5% in REPO and direct investments, and 10% in property investments.

Meanwhile, private insurance companies should follow OJK Regulation No. 71 POJK.05/2016 for their investments.15 Investment limits are stated in Table 18.

14 MOF Indonesia. Jaringan Dokumentasi dan Informasi Hukum Kementerian Keuangan Republik Indonesia. (Ministry of Finance Indonesia Legal Documentation and Information Network) https://jdih.kemenkeu.go.id/fullText/2015/55TAHUN2015PP.pdf 15 OJK. 2016. Salinan Peraturan Otoritas Jasa Keuangan Nomor 71/POJK.05/2016 Tentang Kesehatan Keuangan Perusahaan Asuransi Dan Perusahaan Reasuransi [OJK Regulation No. 71 POJK.05/2016: Insurance Companies and Reinsurance Companies] https://www.ojk.go.id/id/kanal/iknb/regulasi/asuransi/peraturan-ojk/Documents/Pages/POJK-tentang-Kesehatan-Keuangan-Perusahaan-Asuransi-dan-Perusahaan-Reasuransi/SAL%20-%20POJK%20Kesehatan%20Keu%20PA%20PR%20-.pdf

Total LifeInsurance

GeneralInsurance Reinsurance Social

InsuranceHealth

Insurance

Others 48.96 30.07 8.70 1.07 2.98 6.14

Mutual Fund 245.46 167.11 15.86 2.47 37.88 22.14

Corporate Bonds & Sukuk 109.13 25.77 7.80 1.87 42.76 30.93

Marketable Securities Issued By GOI 280.30 63.83 9.60 1.78 173.73 31.36

Stocks 227.85 141.47 3.82 0.48 67.99 14.09

Time Deposit 124.93 35.71 26.14 3.60 46.95 12.53

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

in ID

R tr

illio

n

https://jdih.kemenkeu.go.id/fullText/2015/55TAHUN2015PP.pdf

https://www.ojk.go.id/id/kanal/iknb/regulasi/asuransi/peraturan-ojk/Documents/Pages/POJK-tentang-Kesehatan-Keuangan-Perusahaan-Asuransi-dan-Perusahaan-Reasuransi/SAL%20-%20POJK%20Kesehatan%20Keu%20PA%20PR%20-.pdf



23

Table 18: Investment Restrictions or Limitations for Private Insurance Companies


Deposits in bank (< to 1 month) 20% of total investment.

Time Deposits For one rural bank or rural Shariah bank, 1% of total investment, or a maximum of 5% of total investment.

NCD 50% of total investment.

Stocks listed at stock exchange For each company, 10% of total investment; Maximum of 40% of total investment.

Corporate bonds listed at stock exchange

20% of total investment per issuer, or a maximum of 50% of total investment.

MTN 20% of total investment per issuer, or a maximum of 50% of total investment.

Mutual Funds 20% of total investment per each investment manager, or a maximum of 50% of total investment.

ABS 10% of total investment per each investment manager, or a maximum of 20% of total investment.

KIK 10% of total investment per each investment manager, or a maximum of 20% of total investment.

REPO 2% of total investment per counterparty, or a maximum of 10% of total investments.

Direct participation on shares not listed at stock exchange

10% of total investment.

Land, Property 20% of total investment.

Gold 10% of total investment.

Investment in form of loans guaranteed by mortgage

10% of total investment.

Investment in form of policy loan 80% of cash value of the policy.

Bonds issued by other sovereigns 10% of total investment.

ABS = asset-backed securities, KIK = Kontrak Investasi Kolektif, MTN = medium-term note(s), NCD = negotiable certificate of deposit, REPO = repurchase agreement Source: OJK.

Investment practices – Private Life and General Insurance

Based on interviews with market players, investments serve to match the existing liabilities of insurance companies. The key points from the interviewees are summarized in Table 19. Life insurance companies and social insurance leaned more on equities and government bonds, while general insurance companies placed more investments in time deposits.

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Table 19: Summary of General Investment Criteria for Corporate Bonds

Life Insurance General Insurance Social Insurance Tenor 3–10 years 2–5 years 3–5 years Currency IDR and USD IDR and USD IDR Credit Rating A A A-

IDR = Indonesian rupiah, USD = United States dollar Source: Interviews from select companies per insurance segment.

When the OJK issued the regulation on minimum investments on bonds, insurance companies started to have higher investments on bonds. The OJK mandated a 20% investment ratio on bonds. However, insurance companies chose to put more investments on government bonds.

Life insurance companies offer investment-linked insurance product (ILIP), a combination between insurance and mutual funds which follow certain benchmarks. Most of the benchmarks are equity-related, but there are also bonds, time deposits, mixed, and even USD bonds benchmarks. The maturities of corporate bonds invested for ILIP are mostly 3 years, similar to maturities of corporate bonds invested by mutual funds. As ILIP is a very popular life insurance product in Indonesia, maturity appetite of life insurance companies in the country is not as long as those of other countries where traditional life insurances are the main products.

Table 19 also shows life insurance and general insurance companies have investments in USD bonds. Life insurance companies only invests in USD bonds if they offer USD-ILIP in the market. On the other hand, general insurance companies have investments in USD bonds to support their clients with USD insurance policies (e.g., in aviation and marine insurance). However, USD bonds are only a small fraction of their total investments compared to IDR bonds.

Investment practices – social insurance

From the interviews, it was noted that one social insurance program in Indonesia handles their own investment activities. The current portfolio mix is 60%–70% in bonds, of which 70% are in government bonds and Shariah. Another 20% is invested in equities and 10%–13% in time deposits. Government bond investments have maturity of more than 10 years.

3.4. Local Banks

The OJK Banking Statistics 2018 report stated that commercial banks’ investments in securities were categorized into Bank Indonesia certificates, treasury bills, bonds, and others.16 Bonds took up 65% of total investments by end of 2018. There was no breakdown on the type of bonds that local commercial banks were currently investing. A summary of the statistics is shown in Table 20.

Table 20: Commercial Banks Securities Investments (IDR trillion)

2013 2014 2015 2016 2017 2018 BI Certificates 111.69 113.10 40.02 96.10 19.90 39.44 Treasury Bills 17.91 19.42 26.44 31.35 53.30 61.17 Bonds 323.94 369.85 485.24 561.96 637.77 616.06 Others 67.10 134.32 109.13 171.10 324.36 225.26 Total 520.64 636.69 660.83 860.52 1,035.39 941.94

BI = Bank Indonesia Source: OJK.

16 OJK. https://www.ojk.go.id/en/kanal/perbankan/data-dan-statistik/statistik-perbankan-indonesia/default.aspx

https://www.ojk.go.id/en/kanal/perbankan/data-dan-statistik/statistik-perbankan-indonesia/default.aspx

25


In April 2018, Bank Indonesia issued a new regulation regarding Macroprudential Intermediation Ratio (RIM), PBI No. 20/4/2018 (“Rasio Intermediasi Makroprudensial/RIM”)17. Under this regulation, the securities component of a local bank is incorporated into the financing and funding ratio. Corporate bonds should be of investment grade in order to be included in the computation of RIM. This regulation is expected to increase the demand for corporate bonds among local banks.

Investment practices

Each bank follows their respective internal criteria in investing. In an interview, one local bank mentioned that its minimum credit rating criteria for corporate bonds is AA. However, brokerage firms told that some banks can invest in corporate bonds as low as the investment grade. Though risk appetites are different from one bank to another, it seems that the average credit appetite of banks is similar to those of other investor groups whose minimum credit rating criteria for corporate bonds is A. Aside from this, the consideration for the tenor is diverse—they can invest on corporate bonds with tenor of up to 5 years; however, in terms of trading, they are actively trading those bonds with tenors of 1–3 years since this is the current demand of the market. This correlates with the overall characteristic of the corporate bond market of Indonesia wherein the supply is more on the short term (i.e., bonds with maturity of up to 3 years).

3.5. Other Investors

Individuals

Although not shown in Table 13, local individual investors held 4% of the total corporate IDR bonds in 2018. Based on the meeting with market participants, these individual investors are considered as “high net worth”. They also participate in the corporate bond market through mutual funds and ILIP.

As mentioned earlier, based on OJK Regulation POJK No. 11/2018, an individual is considered as a “professional investor” if he or she has:

• The ability to analyze the risk of investment in securities with at least 1-year investment experience; • Net assets of at least IDR10 billion (~USD685,000), excluding land, buildings and intangible assets; and • An average investment portfolio in the capital market of at least IDR3 billion (~USD205,000) in 1 year

before the public offering of bonds and/or sukuk is conducted.

With this regulation, high net worth individuals are encouraged to have a more active and direct participation in the bond market compared to ordinary retail investors.

Foreign Investors

Foreign investors have very little participation in the corporate bond market of Indonesia, as seen in Figure 1. Among the foreign investor groups, insurance companies and pension funds rarely invest in IDR corporate bonds, as shown in Table 21. A 20% withholding tax is levied on all interest income earned by foreign investors. Capital gains on bonds are also subject to 20% tax. However, this may vary depending on existing tax treaties between Indonesia and the investor’s country of origin. These tax rates are among the challenges especially faced by foreign investors when entering the Indonesian corporate bond market.

17 Bank Indonesia. https://www.bi.go.id/id/peraturan/ssk/Pages/PBI_200418.aspx

https://www.bi.go.id/id/peraturan/ssk/Pages/PBI_200418.aspx

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Table 21: Breakdown of Foreign Ownership of IDR Corporate Bonds, 2013–2018 (IDR trillion)

2013 2014 2015 2016 2017 2018 Mutual Fund 3 2 1 2 2 2 Pension Fund 0 0 0 0.1 0.09 0.1 Financial Institution 5 7 8 7 8 6 Insurance 0.02 0.01 0.09 0.09 0.08 0.09 Others 6 12 9 11 21 21 Total 14 21 19 19 31 29

Note: Figures may not add up to total due to rounding off. Source: OJK Monthly Statistics (4th Week, December 2018).

4. Other Market Participants

4.1. Issuers

Using data from IDX and Bloomberg as of December 2018, 37% of total outstanding bonds were issued by banks. This was followed by companies in the finance sector, which issued 22% of total outstanding bonds. Companies in infrastructure, utilities and transportation recorded 18% in total outstanding bonds. Figure 5 shows the share of issuers by sector.

Figure 5: Issuers According to Sector

Sources: IDX (for list of bonds); Bloomberg (for values).

Figure 6 shows the breakdown of issuer group when SOEs are classified as one group regardless of the industries they belong to. From the figure, about 46% of the total outstanding bonds came from SOE issuances. This confirms the influence of SOEs in the characteristics of the corporate bond market in Indonesia.

Banks, 37%

Finance, 22%

Infrastructure, Utilities and Transportation,

18%

Property, Real Estate & Building Construction,

8%

Others, 16%

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Figure 6: State-owned Enterprise as Major Issuer Group

SOE = state-owned enterprise Source: IDX (for list of bonds); Bloomberg (for values).

In one way, this shows the challenge for non-SOEs to tap corporate bonds as another way of financing. Market players noted that even non-SOEs with A-ratings may find it hard to sell corporate bonds. For these non-SOE issuers, the tenor of their corporate bonds should be, at most, 3 years; otherwise, it will be challenging to market these bonds to investors.

Table 22, on the other hand, shows the credit ratings of listed issuers and issues in IDX as of August 2018, as rated by local credit rating agencies. About 4% of issuers were non-investment grade issuers whose bonds occupied 1% of total outstanding corporate bonds. Specifically, listed AAA-rated companies took 25% of total number of issuers, and 49% of listed corporate bonds were rated AAA.

Table 22: Number of Issuers and Issues Listed in Indonesia Stock Exchange, According to Credit Ratings

Credit Rating Number of Issuers Number of Issues Number % to Total Number % to Total

AAA 27 25% 298 49% AA 32 29% 144 24% A 37 34% 135 22% BBB 9 9% 23 4% BB 3 3% 6 1% Others 1 1% 3 0% Total 109 100% 609 100%

Source: IDX. August 2018.

4.2. Credit Rating Agencies Various regulations of OJK have advised that investors should invest in publicly-offered corporate bonds, MTNs and ABS with credit ratings from a licensed credit rating agency (CRA) of OJK. At present, there are two OJK-licensed CRAs in Indonesia: PT Pemeringkat Efek Indonesia (PEFINDO) and PT Fitch National Ratings Indonesia (Fitch National Rating).

PEFINDO

A locally-owned domestic CRA, PEFINDO was established in 1993 under the initiative of OJK and Bank Indonesia. Since then, PEFINDO has rated more than 500 companies and regional governments. Aside from bonds, PEFINDO also rates MTNs, KIK-EBA, and mutual funds.

SOE, 46%

Finance, 13%

Banks, 16%

Infrastructure, Utilities and Transportation,

8%

Others, 17%

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A recent development in PEFINDO is its partial guarantee methodology. A 20% guarantee of the principal from an AAA-rated guarantor makes the issue rating one notch higher than the issuer rating.18

Fitch National Rating

Fitch National Rating was established in 2005. It is the only international rating agency with presence in Indonesia. Based on its published profile, it has already covered 95 companies in Indonesia, comprising 79 national ratings, 39 international ratings, and 23 dual ratings (this means national and international ratings from Fitch National).19

4.3. Bond Pricing Agency

Indonesia Bond Pricing Agency

Currently, there is only one bond pricing agency authorized under the OJK in Indonesia – the Indonesia Bond Pricing Agency (IBPA). The IBPA was established under the BAPEPAM-LK (then name of OJK) Number VC3 on securities pricing agency. In 2009, the IBPA acquired license from BAPEPAM-LK as the first securities pricing agency in Indonesia. The shareholders of IBPA include IDX, KSEI, and KPEI.

As the sole bond pricing agency in the country, IBPA’s main function is to assess and determine fair market prices for debt securities in Indonesia on a daily basis. The IBPA covers both government bonds and corporate bonds. As of August 2018, IBPA had already priced 94.09% of government bonds and 98.45% of corporate bonds. The remaining bonds not priced by IBPA are those non-investment grade.

4.4. Regulatory Authorities

Otoritas Jasa Keuangan (Financial Services Authority)

The Otoritas Jasa Keuangan (OJK) is the lead government agency which regulates and supervises the financial services sector in Indonesia. This includes banks, securities companies, insurance, mutual funds, pension funds, microfinance institutions, and the Shariah capital market. The OJK also oversees the licensing and supervising of capital market supporting institutions and professionals.

Bank Indonesia

Bank Indonesia is the central bank of Indonesia, which has a single objective of achieving and maintaining stability of the rupiah based on two aspects: (i) stability against goods and services, and (ii) stability of exchange rate of the Indonesian rupiah with other currencies. With this, the role of Bank Indonesia in the bond market is in the foreign exchange regulations. Two regulations that affect cross border issuances are:

• PBI No.16/22/PBI/2014 that requires Indonesian companies that have foreign debt to report their external debt position to Bank Indonesia20; and

• PBI No.16/10/PBI/2014 that requires proceeds from foreign debt (including from Komodo Bond Issuance) being accepted by Indonesian debtors through domestic bank.21

18 A prerequisite for the partial guarantee is an issuer rating from PEFINDO. 19 Fitch Ratings Indonesia. https://www.fitchratings.com/site/indonesia 20 Bank Indonesia. https://www.bi.go.id/id/peraturan/moneter/Pages/PBI_162214.aspx 21 Bank Indonesia. https://www.bi.go.id/id/peraturan/moneter/Pages/PBI_16102014.aspx

https://www.bi.go.id/id/peraturan/moneter/Pages/PBI_162214.aspx

https://www.bi.go.id/id/peraturan/moneter/Pages/PBI_16102014.aspx

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5. Credit Spreads

A credit spread means the price of the credit risk. As government bonds are considered credit risk-free in each country, the additional yield on top of government bond with same maturity is the price of the credit risk from a credit bearing bond. Table 23 shows the IDR yield matrix as of 20 December 2018. It indicates the yields corresponding to each maturity and each sector or credit rating.

Table 23: IDR Corporate Bond Yield Matrix, 20 December 2018 (%)

Credit Rating 1Y 3Y 5Y 7Y 10Y IGB 7.46 7.97 8.07 8.18 8.23 AAA 8.85 9.29 9.41 9.59 9.69 AA 9.14 9.73 10.05 10.24 10.27 A 10.33 10.9 11 11.33 11.77 BBB 11.87 13.01 13.54 14.04 14.49

Y = year Source: IBPA.

The IBPA provides the yield matrix every day, which can be the basis for bond trading in Indonesia. From Table 23, 7.97% is observed for the 3-year government bond yield, while 9.73% is observed for the 3-year AA rated bond yield. From these yields, credit spread of 3-year AA ra ted bond is calculated as 1.76%. Once yield matrix is provided, a credit spread matrix which shows the credit spreads corresponding to each maturity and each credit rating can be obtained. Table 24 illustrates the credit spread matrix calculated from the yield matrix shown in Table 23.

Table 24: IDR Credit Spread Matrix, 20 December 2018 (%)

Credit Rating 1Y 3Y 5Y 7Y 10Y AAA 1.39 (0.21) 1.32 (0.17) 1.34 (0.17) 1.41 (0.17) 1.46 (0.18) AA 1.68 (0.26) 1.76 (0.24) 1.98 (0.26) 2.06 (0.26) 2.04 (0.25) A 2.87 (0.43) 2.93 (0.38) 2.93 (0.36) 3.15 (0.39) 3.54 (0.44) BBB 4.41 (0.66) 5.04 (0.65) 5.47 (0.68) 5.86 (0.72) 6.26 (0.77)

Y = year Note: Numbers in parentheses are equal to the ratio of credit spread to government bond yield with same maturity. Source: IBPA.

Table 24 provides some implications on Indonesia’s corporate bond market, in addition to that of the general trend that lower credit rating shows higher credit spread under the same maturity. First, the table indicates that the credit spread of AAA rating is relatively stable through the maturity. This suggests that investors are more willing to take long tenor if credit rating is AAA. As credit rating goes down, the credit spread increases more rapidly towards longer maturity. Second, the table further indicates that the additional spread from A to BBB is 2.07%, whereas those from AA to A is 1.17% and those from AAA to AA is 0.44%. This implies that much more spread is required for investors to spend on BBB rated bonds. This observation is in line with the feedback from investors that most of them would prefer to invest on A or higher-rated corporate bonds.

Credit spreads of Indonesia’s corporate bond market appear to be more extensive compared to those of peer countries such as Thailand or Malaysia. As shown in Tables 24 and 25, credit spreads of Thailand are still below 1% even if credit rating goes down as low as single A. Whereas, those of Indonesia are already above 1% even if credit rating is AAA. However, credit spreads of Indonesia are not that significant if yield levels of each country are considered. For IDR, its 3-year AA-rated credit spread is 1.76%, which is 24% of IDR 3-year government bond yield, 7.97%. In comparison, for THB, its 3-year AA-rated credit spread is 0.85%, which is 46% of THB 3-year government bond yield, 1.85%. This result supports the idea that credit spreads are not overpriced in Indonesia even if their absolute levels are high.

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Table 25: THB and MYR Credit Spread Matrix, 20 December 2018 (%)

1Y 3Y 5Y 7Y 10Y

AAA THB 0.47 (0.30) 0.69 (0.37) 0.74 (0.33) 1.00 (0.39) MYR 0.56 (0.15) 0.56 (0.15) 0.61 (0.15)

AA THB 0.64 (0.41) 0.85 (0.46) 0.91 (0.41) 1.17 (0.46) MYR 0.85 (0.23) 0.86 (0.22) 0.96 (0.23)

A THB 0.67 (0.42) 0.91 (0.49) 0.97 (0.43) 1.17 (0.48) MYR 2.21 (0.60) 2.43 (0.63) 3.39 (0.83)

BBB THB 1.98 (1.25) 2.23 (1.21) 2.30 (1.03) 2.59 (1.01) MYR 4.50 (1.23) 5.32 (1.39) 6.98 (1.71)

MYR = Malaysian ringgit, THB = Thailand baht, Y = year Note: Numbers in parentheses are equal to the ratio of credit spread to government bond yield with same maturity. No data for 7-year bonds. Source: Bloomberg.

6. Komodo Bonds

Komodo bond is an offshore IDR bond issued for infrastructure projects in Indonesia, as per the description from relevant Indonesian regulators. Though it is unclear whether Komodo bond includes offshore IDR bonds issued by foreign entities for infrastructure, Komodo bond referred in this report only includes offshore IDR bonds issued by Indonesian entities. Just like other offshore IDR bonds, coupons and principal of the Komodo bond are fixed in terms of IDR value but paid in USD.22

As of time of writing, two Komodo bonds have been issued (see Table 26). Proceeds from the Komodo bonds of Jasa Marga and Wijaya Karya were used for their infrastructure projects in Indonesia.

Table 26: List of Komodo Bonds from Indonesian Companies23

Issuer Issue Amount (USD million)

Issue Date Maturity Date Coupon Rate Listing

Jasa Marga Persero Tbk PT 295.37 11 Dec 2017 11 Dec 2020 7.5% LSE, SGX

Wijaya Karya Persero Tbk PT 405.53 1 Jan 2018 31 Jan 2021 7.74% LSE, SGX

LSE = London Stock Exchange, SGX = Singapore Stock Exchange Source: Bloomberg.

Based on information from Bank Indonesia, requirements for Komodo bond issuance include:24

• Komodo bonds should be in plain, vanilla form. • Minimum tenor is 3 years. • Exchange rate to be used in Komodo bonds should be the spot rate at the time of settlement. Pre-fixing

of exchange rate is not allowed. • From liquidity and leverage perspective, issuers of Komodo bonds shall be subject to liquidity

requirements related to net open position of foreign and onshore IDR debt, according to Bank Indonesia regulation PBI No.16/22/PBI/20.

• No issuer rating is required, if any of the following conditions are met: (i) the potential Komodo bond should be for a government-sponsored infrastructure projects, (ii) for nongovernment infrastructure

22 Information on the description of Komodo bonds came from inquiries and meetings with regulators in Indonesia. 23 The IFC also issued a “green Komodo bond”. Based on news reports, the proceeds from the IFC will be used for funding of climate-related projects in Indonesia in accordance to green bond principles. 24 Information gathered on April 2018.

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project, the investors are international multilaterals, and (iii) the bond is guaranteed by an international organization.

Jasa Marga issued the first Komodo bond with the objective of tapping foreign investors. As Jasa Marga wanted its Komodo bond to be fairly priced, the company decided on a 3-year tenor on the presumption that investors might require more spread if tenor is longer due to the unfamiliarity from the “first” issuance of the Komodo bond. As a result, this Komodo bond was a success, since it was oversubscribed: the total demand from investors is IDR15.8 trillion, whereas the amount issued by Jasa Marga was only IDR4 trillion. With this success, Jasa Marga is expected to tap longer Komodo bond issuance in the future, which is more in line with its funding appetite for infrastructure finance.

One challenge for potential Komodo bond issuers is the taxes. Issuers are regulated to shoulder the 20% withholding tax from Komodo bond coupon payments. This increases the cost of issuing Komodo bonds compared to onshore IDR bonds. Potential Komodo bond issuers are expecting that the tax rate will drop to 5%, which can lead to more Komodo bonds to be issued.

After Jasa Marga and Wijaya Karya issued their Komodo bonds, other SOEs also planned to issue their own Komodo bonds.25 However, the plans were postponed due to the continual depreciation of IDR against USD.

7. Guaranteed Corporate Bonds

Table 27 shows that the ratio of guaranteed bonds to total LCY corporate bonds in terms of value is only 2% in Indonesia, the lowest in ASEAN6.

Table 27: Local Currency Guaranteed Bonds in ASEAN6 Countries (USD millions)

LCY Corporate Bonds LCY Guaranteed Bonds Country Value

(A)

Number of Bonds

(B)

Value

(C)

Number of Bonds

(D)

Ratio of Value of Guaranteed Bonds

(C/A)

Ratio of Number of Guaranteed Bonds

(D/B)

Indonesia 34.69 938 0.58 10 1.7% 1.1% Viet Nam 4.08 72 0.48 9 11.8% 12.5% Philippines 28.43 233 0.55 7 1.9% 3.0% Thailand 91.01 1,468 8.71 109 9.6% 7.4% Singapore 53.02 339 20.98 145 39.6% 42.8% Malaysia 171.43 2,385 53.59 955 37.1% 40.0%

LCY = local currency Source: Bloomberg.

Figure 7 provides an illustration on the scope of guarantees extended by guarantors (the government, corporates, and specialized guarantors such as CGIF and IFC) in 2018. As of 31 December 2018, there were 10 guaranteed IDR corporate bonds in Indonesia, which accounted for IDR7.7 trillion.

25 One example is Perusahaan Listrik Negara (PLN), an electricity distribution SOE, which plans to issue its Komodo bond with longer tenor (5 years and 10 years). With the current situation, PLN issued global bonds offshore.

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Figure 7: Guaranteed Corporate Bond Market in Indonesia, 2018

CGIF = Credit Guarantee and Investment Facility, IFC = International Finance Corporation Note: The percentages are derived from the value of guaranteed corporate bonds. Source: Bloomberg.

7.1. IDR Guaranteed Bonds

1) General Description

The 10 guaranteed bonds are from five local issuers. Table 28 provides a summary of the guaranteed bond issuances. Hutama Karya Persero PT has the highest number of issuances, which are fully guaranteed by the national government. In terms of maturity, even guaranteed bonds mirror the overall short-term profile of Indonesia’s corporate bond market.

Table 28: Information on IDR-Denominated Guaranteed Corporate Bonds in Indonesia

Issuer Industry Guarantor Number of Issues

Total Amount (IDR billions)

Average Maturity

(Y) Hutama Karya Persero PT Industrial Republic of Indonesia 4 6,500 8.75

PT Ciputra Residencea Real Estate IFC 2 300 6 Mitra Pinasthika Mustika Finance PT Financial CGIF 2 300 3

MUFJ Lease & Finance Sub Financial MUFJ Lease & Finance 1 300 3

Blessindo Terang Jaya PT Real Estate Mandiri Mega Jaya PT (Parent Company)b 1 300 3

CGIF = Credit Guarantee and Investment Facility, IFC = International Finance Corporation, Y = year a Though the first tranche was redeemed in December 2017, it was included in the list to show full information on guaranteed bonds of PT Ciputra Residence. b Mandiri Mega Jaya PT holds 99% of shares of Blessindo Terang Jaya PT. Source: Bloomberg.

Being an active issuer group, SOE issuers take advantage of their status to attract bond investors since investors perceive that there is an implicit guarantee from the government if the bond is from an SOE. Local investors see the effect of credit guarantees to be reflected in the credit ratings of the bonds. In terms of investment preferences, local investors may consider guaranteed bonds as long as the resulting price will still be competitive.

Government84%

Corporates8%

IFC4%

CGIF4%

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2) Details of IDR Guaranteed Bonds

Hutama Karya Persero PT

Bonds issued by Hutama Karya Persero PT were guaranteed by the government. The issuance was intended for the development of the Trans-Sumatera Toll Road, which is one of the missions of Hutama Karya as an SOE.26

Table 29: Details on a Hutama Karya’s Guaranteed Bond

Issuer Hutama Karya Persero PT Issuer Description State-owned construction company in the civil engineering and general contractor

business Issue Date 21 December 2016 Issue Amount IDR1,000 billion Maturity 10 years Guarantor Government of Indonesia Guarantee Rate 100% Issuer Rating A- (PEFINDO) Issue Rating AAA (PEFINDO)

Source: Bloomberg.

PT Ciputra Residence

Among the first issuances of guaranteed bonds were from PT Ciputra Residence, a subsidiary of PT Ciputra Development Tbk, with guarantee from the IFC. This bond was also the first partial guaranteed bond in Indonesia. The IFC’s partial guarantee elevated the bond rating from A- to A, which resulted to pension funds being able to participate in the offering. Aside from pension funds, the bond was also offered to insurance companies, banks, foundations, and asset managers.27

Table 30: Details on PT Ciputra Residence’s Guaranteed Bonds

Issuer PT Ciputra Residence Issuer Description Indonesian real estate company Issue Date 2 April 2014 Amount IDR500 billion Tranches 3 years (IDR200 billion), 5 years (IDR220 billion), 7 years (IDR80 billion) Guarantor International Finance Corporation Guarantee Rate 20% Issuer Rating A- (Fitch National) Issue Rating A (Fitch National) Rational behind partial guarantee

Single A is the minimum required rating for Indonesian pension funds to invest in corporate bonds (at the time of issuance)

Security Fixed assets valued at 120% of issuance amount Specialty First Partial Guarantee-enhanced bond in Indonesian capital market

Source: Bloomberg, CGIF

26 Hutama Karya Annual Report, 2017. 27 Highlights of IFC’s Guarantee on PT Ciputra Residence Bond in 2014. https://www.ifc.org/wps/wcm/connect/1c069e804a9c2ad3a791ef9c54e94b00/Ciputra+Factsheet.pdf?MOD=AJPERES

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PT Mitra Pinasthika Mustika Finance

PT Mitra Pinasthika Mustika Finance (MPMF) also issued bonds with full guarantee from CGIF. The guarantee provided benefits for both the issuer and the investor. It enabled MPMF to diversify its funding sources and made the IDR corporate bond market accessible to foreign investors.

Table 31: Details on MPMF’s Guaranteed Bonds

Issuer PT Mitra Pinasthika Mustika Finance (MPMF) Issuer Description Indonesian auto finance company, co-owned by Indonesian and Japanese corporates Issue Date Tranche A: 11 March 2016 / Tranche B: 28 April 2016 Amount Tranche A: IDR140 billion / Tranche B: IDR160 billion Tranches 3 years for both tranches Guarantor Credit Guarantee and Investment Facility Guarantee Rate 100% unconditional and irrevocable guarantee of non-payment Issuer Rating AA- (Fitch National) Issue Rating None Specialty Fully placed in one insurance company in Japan

Source: Bloomberg, CGIF.

7.2. Foreign Currency Guaranteed Bonds

1) General Description of Foreign Currency Guaranteed Bonds

Based on the data extracted from Bloomberg, five outstanding FCY guaranteed bonds with four issuers were observed as of 31 December 2018. Table 32 shows that among the five guaranteed bonds, four are denominated in USD and one in SGD.

Table 32: List of Foreign Currency Guaranteed Bonds Issued by Indonesian Companies

Issuer Industry Guarantor Number of Issues

Currency Total Amount (millions)

Maturity (Y)

Gajah Tunggal Tbk PT Auto Parts Prima Sentra Megah

PT (Subsidiary) 1 USD 250 5

PT Chandra Asri Petrochemical Tbk Petrochemicals Multiple Subsidiaries 1 USD 300 7

PT Japfa Comfeed Indonesia Tbk Animal Feeds Multiple Subsidiaries 2 USD 250 5

Profesional Telekomunika

Telecom Tower Lease CGIF 1 SGD 180 10

CGIF = Credit Guarantee and Investment Facility, SGD = Singapore dollar, USD = United States dollar, Y = year Source: Bloomberg.

2) Details on Foreign Currency Guaranteed Bonds28

As of 31 December 2018, Indonesian entities which issued FCY guaranteed bonds were either guaranteed by subsidiaries or CGIF. When guarantors were subsidiaries, issue ratings were the same as issuer ratings. The next three sub-sections discuss the FCY bonds guaranteed by the group company.

28 Details of FCY guaranteed bonds are from Bloomberg and available information published online.

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PT Gajah Tunggal Tbk

PT Gajah Tunggal Tbk issued USD250 million bonds in 2017 for refinancing. The 2017 Annual Report of Gajah Tunggal stated that the bond was secured by certain property in the form of (i) land, building and tire production facilities and tire cord in Tangerang, (ii) other plant and equipment, and (iii) all capital stock of the subsidiary, Prima Sentra Megah PT (PSM).

Table 33: Details on Gajah Tunggal’s Guaranteed Bond

Issuer PT Gajah Tunggal Tbk Issuer Description Automotive tire manufacturer Issue Date 10 August 2017 Issue Amount USD250 million Maturity 5 years Guarantor Prima Sentra Megah PT (PSM, subsidiary) Guarantee Rate 100% Issuer Rating B2 (Moody’s), B- (S&P) Issue Rating B2 (Moody’s), B- (S&P)

Source: Bloomberg.

PT Chandra Asri Petrochemical Tbk

The issuance of USD300 million from PT Chandra Asri Petrochemical Tbk was to fund its capital expenditures related to increasing production capacity and/or product diversification, as well as other capital expenditures to further increase the scale of business. Chandra Asri Petrochemical noted that the guarantee from its subsidiaries were unconditional and irrevocable.

Table 34: Details on Chandra Asri Petrochemical’s Guaranteed Bonds

Issuer PT Chandra Asri Petrochemical Tbk Issuer Description Integrated petrochemical producer; Serves both domestic downstream

industries and regional export markets in Indonesia Issue Date 8 November 2017 Issue Amount USD300 million Maturity 7 years Guarantor PT Styrindo Mono Indonesia, PT Petrokimia Butadiene Indonesia Guarantee Rate No information from Bloomberg Issuer Rating Ba3 (Moody’s), B+ (S&P), BB- (Fitch) Issue Rating Ba3 (Moody’s), B+ (S&P), BB- (Fitch)

Source: Bloomberg.

PT Japfa Comfeed Indonesia Tbk

PT Japfa Comfeed Indonesia Tbk, with an integrated agribusiness operation in Indonesia, issued USD250 million bond, which was 100% guaranteed by its subsidiaries. The bond was intended for refinancing.

Table 35: Details on Japfa Comfeed Indonesia’s Guaranteed Bonds

Issuer PT Japfa Comfeed Indonesia Tbk Issuer Description Manufacturer of animal feeds, breeds and processes chicken, and operates

aquaculture farms Issue Date Tranche A: 31 March 2017 / Tranche B: 19 June 2017 Issue Amount Tranche A: USD150 million / Tranche B: USD100 million

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Maturity 5 years for both tranches Guarantor Multiple Subsidiaries Guarantee Rate 100% Issuer Rating BB- (S&P), BB- (Fitch); AA(idn) (Fitch National) Issue Rating BB- (S&P, Fitch)

Source: Bloomberg.

PT Profesional Telekomunikasi Indonesia

PT Profesional Telekomunikasi Indonesia (Protelindo) issued SGD180 million bond, with 100% guarantee from CGIF. During the initial offering, 91% of the issue was allocated to investors in Singapore. In terms of investor type, 67% was allocated to asset managers, 23% to insurance companies, and the remaining to sovereign wealth funds, banks, and corporations. As of December 2018, this was the only outstanding FCY bond from Indonesian entity which was guaranteed by a third-party guarantor.

Table 36: Details on Protelindo’s Guaranteed Bond

Issuer PT Profesional Telekomunikasi Indonesia (Protelindo) Issuer Description Builds, operates, and leases telecommunication towers for wireless operators in

Indonesia Issue Date 17 November 2014 Issue Amount SGD180 million Maturity 5 years Guarantor Credit Guarantee and Investment Facility Guarantee Rate 100% Issuer Rating BB+ (S&P), Ba2 (Moody’s), BB (Fitch) Issue Rating AA (S&P)

SGD = Singapore dollar Source: Bloomberg, CGIF.

8. Regulatory Direction

As the primary regulator for corporate bonds, OJK plans to implement changes on Indonesia’s bond market. Some of OJK’s plans include:

• Initiative to increase local investors. The OJK plans to encourage the establishment of provincial securities companies to get closer to potential investors across Indonesia. Investors still lean towards having a savings behavior rather than an investment behavior. Provincial securities companies may become a channel to educate and to provide investment opportunities to provincial investors.

• Funding of infrastructure projects. The OJK plans to amend regulations on KIK. Some of the amendments include provisions allowing the establishment of KIK for an infrastructure project at any given stage and tax incentives for KIK funds.

• New regulations. At the time of writing, OJK is drafting four regulations related to bond market development: (i) MTN regulations, (ii) green bond regulations, (iii) regulations for the representatives of intermediaries in the bond market, and (iv) electronic trading platform regulations.

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Notes

Credit ratings are based on local credit rating agencies in respective ASEAN 6 countries. As reference, the following links provide the definition for credit ratings per each country in this report.

• Indonesia, PEFINDO: http://www.pefindo.com/index.php/fileman/file?file=95 • Malaysia, RAM Ratings: https://www.ram.com.my/ratings/?morph=callpage&catid=90 • Singapore, Moody’s: https://www.moodys.com/Pages/amr002002.aspx • Thailand, TRIS: https://www.trisrating.com/files/3515/3795/8152/Symbol-e_Apr18.pdf • Philippines, PhilRatings: http://www.philratings.com/(S(yf1prav3ubqqip55fkkitl45))/issue.htm

http://www.pefindo.com/index.php/fileman/file?file=95

https://www.ram.com.my/ratings/?morph=callpage&catid=90

https://www.moodys.com/Pages/amr002002.aspx

https://www.trisrating.com/files/3515/3795/8152/Symbol-e_Apr18.pdf

http://www.philratings.com/(S(yf1prav3ubqqip55fkkitl45))/issue.htm

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References

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Asian Development Bank. 2017. ASEAN+3 Bond Market Guide 2017. Indonesia. Manila. https://www.adb.org/sites/default/files/publication/350016/asean3-bond-market-indo-2017.pdf

Bloomberg. https://www.bloomberg.com/asia

Chandra Asri Petrochemical. 2017. Terus Berkembang: 25 Years of Growth & Excellence. Annual Report 2017. http://www.chandra-asri.com/files/attachments/reports/annual/Annual%20Report%20CAP%202017.pdf

Hutama Karya. 2017. Driving Transformation Towards Excellence [Mendorong Perubahan Menjadi Lebih Unggul]. Annual Report 2017. https://drive.google.com/file/d/1sgBOmSja4U885fj48zebDJgkgNm_5r8z/view

International Finance Corporation. IFC’s Guarantee on PT Ciputra Residence Bond in 2014. https://www.ifc.org/wps/wcm/connect/1c069e804a9c2ad3a791ef9c54e94b00/Ciputra+Factsheet.pdf?MOD=AJPERES

M. Sudjono. 2017. Employer Pension Fund, Prospects and Challenges. A presentation for the Indonesia Pension Conference, 25 Years of Pension Savings. Jakarta, Indonesia. 25–26 April 2017. https://www.ojk.go.id/id/kanal/iknb/berita-dan-kegiatan/info-terkini/Documents/Pages/OJK-dan-World-Bank-Gelar-Indonesia-Pension-Conference/Session1_Mudjiharno%20M.%20Sudjono.pdf

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OJK Monthly Statistics (4th Week, December 2018) https://www.ojk.go.id/id/kanal/pasar-modal/data-dan-statistik/statistik-pasar-modal/Default.aspx

https://www.adb.org/sites/default/files/publication/350016/asean3-bond-market-indo-2017.pdf

https://www.bloomberg.com/asia

http://www.chandra-asri.com/files/attachments/reports/annual/Annual%20Report%20CAP%202017.pdf

https://drive.google.com/file/d/1sgBOmSja4U885fj48zebDJgkgNm_5r8z/view

https://www.ifc.org/wps/wcm/connect/1c069e804a9c2ad3a791ef9c54e94b00/Ciputra+Factsheet.pdf?MOD=AJPERES

https://www.ifc.org/wps/wcm/connect/1c069e804a9c2ad3a791ef9c54e94b00/Ciputra+Factsheet.pdf?MOD=AJPERES

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https://www.ojk.go.id/id/kanal/iknb/berita-dan-kegiatan/info-terkini/Documents/Pages/OJK-dan-World-Bank-Gelar-Indonesia-Pension-Conference/Session1_Mudjiharno%20M.%20Sudjono.pdf










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About This Paper

This research provides an overview of the corporate bond market in Indonesia and its specific characteristics. While Indonesia’s corporate bond market is among the smallest in ASEAN6 countries, the country has welcome new developments such as the issuance of Komodo bonds. Further development of the country’s corporate bond market has been part of the agenda of relevant government agencies. About CGIF

CGIF is a multilateral facility established by the Association of Southeast Asian Nations (“ASEAN”) members, China, Japan, Korea (“ASEAN+3”) and Asian Development Bank (“ADB”). It is established as a trust fund of ADB with paid-in capital of USD859.2 million from its Contributors. As a key component of the Asian Bond Markets Initiative, CGIF was established to develop and strengthen local currency and regional bond markets in the ASEAN+3 region. CGIF commenced its guarantee operations on 1 May 2012 and seeks to provide credit enhancements, mainly in local currencies, issued by credit worthy ASEAN+3-domiciled bond issuers.

Credit Guarantee and Investment Facility Asian Development Bank Building 6 ADB Avenue, Mandaluyong, 1550, Manila, Philippines Tel: +632 683 1340 Fax: +632 683 1377 www.cgif-abmi.org