The Indonesian government has invited investment banks to pitch for a mandate to structure a securitization deal backed by future flows of natural gas exports from Indonesia to Singapore. The deal could be worth as much as $500 million to $1 billion and is certain to be one of the most tricky and high profile in the Asian securitization market this year.
Bankers are required to respond by February 16 and shortlisted banks will present their proposals between February 26 and 28. The mandate decision is expected to be announced on March 2.
One securitization banker said that he expects nearly every bank with a securitization team in Asia to submit proposals and a few from further afield.
The cashflows that will be parcelled into the securitization come from an export contract signed between Indonesia and a Singapore conglomerate called SembCorp. The contract is for 22 years and will see 325m cubic feet of gas exports per day. The exports themselves will come from Indonesia's West Natuna gas fields.
The length of the contract makes it possible that the bonds could have relatively long maturities of more than 10 years, though bankers doubt whether there will be any investor appetite for long-dated bonds from somewhere as unstable as Indonesia.
Similar to LatAm deals
The deal, which will not reach the market until September at the earliest, is likely to resemble oil- and gas-backed transactions from Latin America, which capture receivables paid by highly rated offshore obligors in order to boost ratings to investment grade. But there are significant differences that bankers will have to address.
The vital difference is that the Latin American countries that have issued future flow deals usually have investment grade local currency sovereign ceilings (or guidelines) even if their foreign currency ceilings are non-investment grade. Mexico, for instance, has a local currency rating of BBB-plus from Standard & Poor's (S&P) compared to only BB-plus for foreign currency.
The same does not apply to Indonesia, however, as both ratings are below investment grade. S&P provides a local rating of B and a foreign currency rating of B-minus, while Moody's Investors Service has provided a Ba1 rating and a B3 rating, respectively.
Nonetheless, bankers said that reaching investment grade is vital as few investors are likely to consider buying junk-rated bonds from Indonesia. Consequently, the deal will require some structural cleverness.
"Structurally, it is possible to get there or there abouts because of the strategic importance of gas exports to the country," a banker said. "There will be a lot of pressure to get it done and the competitive pressures on the rating agencies will make it likely that they will look at it kindly."
One possible enhancement that banks will look to is a large pre-funded offshore reserve account, though this will be economically inefficient as a result of the negative carry.
The other obvious solution is to get third party enhancement, but this may be difficult as the only insurance firm that has shown any appetite for Indonesian risk, Centre Re's Asian subsidiary Centre Solutions, has already wrapped two future-flow export deals for Asia Pulp & Paper (APP). APP is a Singapore-headquartered company with most of its assets in Indonesia and it is very close to default.
Even so, bankers said that it is still possible that some insurance firms may be willing to accept some of the risks involved in the transaction short of an outright wrap. If that happens, it may help in reaching investment grade.
More conservative monoline insurers are unlikely to be keen on Indonesian risk, even if the structuring manages to achieve investment grade ratings, the minimum that would allow monolines to get involved.
The transaction is likely to be made even harder if APP does default - a distinct possibility, even though it has managed to meet all its payments so far within grace periods - as investors who have lost money on APP bonds are likely to be even more wary of Indonesia than before. A default of such a large debtor - APP owes at least $9 billion - is also likely to increase uncertainty in Asian bond markets in general.
The Indonesian government has already discussed a deal's feasibility with several banks, including J.P. Morgan, Morgan Stanley Dean Witter, UBS Warburg and ABN AMRO. Another securitization specialist said that most if not all of the banks have been positive - perhaps even over-optimistic - about the chances of getting the deal done and achieving high investment grade ratings.
"Some of the people who have talked to [the government] have given them totally unrealistic expectations," the banker said. "After the mandate is awarded there will be deal creep' and the deal will change into something more realistic."
Bankers added that if the deal is successful it is likely to lead to several more, as Indonesia has signed or is working on similar agreements with other companies in Singapore and Malaysia.