South and Southeast Asia Corporates

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This is when you see their global head of strategy at Credit Sites. And today, we are traveling across the world. We are going to be having a conversation about Indonesia, and I am welcoming today, Lax, who is our head of South and Southeast Asia corporates, to talk all about some of the really interesting investment opportunities and risks that have been popping up lately. Lax, thank you so much for joining us.

Yeah, thank you, Vinnie, and thanks for having me on the Sport Fest. I am really excited about this one because this admittedly is an area that I don't know that much. And so I think that this is going to be a really valuable conversation because in my conversations with clients for the past couple of years, Indonesia has come up a lot. I've never been there.

I would love to visit. Perhaps we could coordinate a diligence trip after the podcast. And can you give us a quick overview of the type of market activity that we've seen in Indonesian corporates? Why were investors so enthusiastic about the market?

And what were people really looking at? Yeah. So, we have a couple of top of several investors minds when you talk about Asia. Here in Asia, investors have just that many options.

China, there is India, Indonesia, which are one of the top dollar bond issuers. And that's been the case historically, and even the last couple of years, with many issuers getting out of the dollar bond market, the prominence of these regions, such as India, Indonesia, and a couple of other South and Southeast Asian regions only grew in its importance and prominence within the Asian landscape. In the last one, one and a half years, the spreads of many corporate dollar bonds were really under the whitest hint of their historical ranges, and they clearly caught several investors' eyes. And Indonesia was one such place where people were eager to park their money.

Now, of course, in the last one, one and a half years, spreads have come in and it has been still quite tight. And there is much less opportunities here. But then that's what was really that's been on the minds of investors as to how to squeeze some more out of the opportunities that are still there. But they were in for a surprise when some of the political uncertainties were thrown into the mix and that's took the markets.

So in the next step back up a little bit, and look at just after the COVID, there was the Indonesian dollar bond space was dominated by property developers. But in the aftermath of that, they either restructured or exchanged some of their dollar bonds, and now they have relatively withdrawn from the dollar bond market space. There are maybe one or two developers up there. We still have quite the chunk of mining companies.

Old mining is very huge. More than a huge, very huge Indonesia. And it shows from this space. We have private, the old or state-owned enterprises still dominate the outstanding dollar bond market within Indonesia.

So that's how it is shaped up. And we have seen a few new issuances speaking up from the Indonesian, similar to what we have seen from the Indian space. But how it will ban out in the near future is to be seen given all the macro uncertainty. Yeah, so that's a really interesting context.

And Asia is always such a tricky investment landscape. And it feels like capital kind of flows into one country and out of another country. Everybody was really excited about China for a long time. And then we've seen some massive capital flight out of China.

Policy uncertainty seems to be the name of the game in a lot of places at this point. We're certainly encountering that in the United States. And as you alluded to, more recently, we've seen some pressure on Indonesia and risk assets because of policy uncertainty. There's a cabinet reshuffle going on.

So we've seen a lot of people that are in a kind of a weaker fiscal discipline and expanded role in military government. It feels like I'm talking a little bit about the United States. But I'm actually talking about Indonesia right now. What are some of the key macro and policy risks that you think Asian credit investors should be paying closer attention to?

Yeah, since the current Indonesian president, Mr. Provost Suviantu, took Power from the previous district, Jokodi, things having quite turbulent because of various policy changes that have happened and that took in a very short span of time. So it's been like five or six months. And within this time, there is, even doing a stamping here, I alluded to spending a lot on social welfare scheme, one of which is this most popular free lunch program to especially children, and also to hide the pay of teachers.

So this is some of this flagship schemes and that will contain higher spending for the government. That is expected to lead to a wider fiscal deficit. Currently, the sum back goes to 2.5% of GDP. Indonesia has a legal law stipulated limit that fiscal deficit should not exceed 3%.

Now, with these kind of schemes, it seems quite likely that limit might get breached. Now, what has been done to offset that? The revenues that comes to the government in the form of royalties from the commodity mining companies, now that has shrunk the first two months of the year because of the lower commodity crisis. Now, that was a key aspect that actually triggered a sale of large Tuesday in the stock market, and even in the corporate dollar one market of Indonesian companies.

Now, within the first two months of the year, the country has already clocked a fiscal deficit, which was unheard of, and that was lastly only doing the COVID pandemic in 2021. And which is quite understandable. We may not really understand it, but now, we're thinking so much more stable. The good company is growing at a quick, good 5% age in a pan well paid.

So there is little to be done, or little that's being done, to offset that. The cost has also spiraled as we just discussed, and the revenues have also shrunk. He also rolled back on the sales tax that proposed to increase the sales tax, so that was not set into motion, so it's no increase in revenue either. So because of these reasons, a higher physical deficit is really something that's on the top of several investors, the markets, and across different asset costs.

So that's front and foremost. In addition to that, he's also talking about setting up a new sovereign wealth fund called Dhanatara. So this is supposed to be a flagship sovereign wealth fund to replace a one which is existing right now, but which is much, much smaller, which is very small in size. So the new fund, he's looking to reach an AUM of about $900 billion.

Now, what kind of horizon he's not really talking about. But the key is that people are still unclear what the objective of this fund will be. It is said that it will house some of the state-owned enterprises, which correctly is now directly under the Ministry and Administration. So it is hoped that it will spur a growth for a direct investment, and also lead to better management by placing specialist investment managers in the Dhanatara, which will be an intermediate between the government and the various state-owned enterprises.

This will basically also act as for new strategic investments also. But then there is still doubt as to whether this will be used as a vehicle to promote his spending on the social welfare schemes, such as the free lunch program or the future, the hikes, etc. So that's what is also making investors a bit cautious about the new sovereign wealth fund. And finally, the other macro policy is this also that he has relaxed a lot, which previously was there to prevent people in military official to occupy civil government positions or non-combatants.

So the relaxation of this role, it seems that the democratic system of this backsliding into a more authoritarian kind of system. So that's the fear and the risk of civil unrest brought by student groups, etc, which has been reported in the media. So that's also something that's spooking the markets a bit. So these are the key macros that we are watching out for, and that's also something that concerns us for the next few months.

It's such an interesting mix of policy, for sure. And definitely makes me think a little bit about some of the things that have been proposed in the US, with our fiscal deficit being basically double that of Indonesia's capped by law level, and then also discussions around creating a US sovereign wealth fund, which remains to be seen, whether that will actually happen. Also somewhat similarly to the US, we've seen some very choppity equity markets in Indonesia. Equities were down as much as 6% one day last week, and dollar corporates have definitely sold off of it, but not nearly to the same extent.

What do you think is driving the relative resilience of corporates? And do you think that the little bit of spread-winding that we've seen is an opportunity to buy and add more, or perhaps kind of the first leg, and maybe a reason to turn a bit more cautious? In Indonesia, the equity is sold off by about 6%, 7%. It's rebounded and re-hooked some of the clauses.

But at the same time, the dollar bonds did sell off. So on average, the IHG bonds sold off between 5% to 10% and the high yield bonds in the range of 30% to 40%. Our view or outlook is hinges on what we think about what's going to happen at the macroeconomic level. We are not really concerned about the fundamentals of the individual companies or the sectors per se with Indonesia.

We still think that they are quite solid, and they should do well, but at a macro level, we think that provost policy changes is still within the very initial stages, because it's just been six months, and he's definitely the sort of bet he's done with it. So there will be more policy announcements, there will be more over the changes, over the world that will be announced. What it is and what shape it would take, it's a bit hard to speculate right now, but then it will come for sure. So that will induce more volatility in both equity in our corporate dollar bond markets.

So we will be a privately world corporate and even the state-owned companies. So with that in mind, we take a more cautious approach, and we think that we need the position of power sense accordingly. So we are no defensive on the intonation of corporate dollar bonds, and we hence have taken a step in the direction by downgrading a couple of companies on which we earlier had a market performance accommodation to underperform of the external events. So those are one of them is mind-biting, and another one is an upstream oil and gas-producing support report.

So yes, so in an actual, yes, each new thing that more human risk is installed, and therefore we have a more cautious approach. Yeah, I think that that makes a lot of sense, and we're similarly situated in the US, though we've seen some spread widening. We think that the relentless deluge of headlines is probably going to persist in the near term. And I guess that brings us into the next topic, which is the global economic and geopolitical moving pieces.

The Asia team just put out a note on US tariff risk by market. This has been very well received by our clients, and definitely a top question that we are getting, who's exposed, who's insulated. It seems like Indonesia and some of the other Southeast Asian credits are a bit more insulated compared to Korea and China, when we think about fundamental and operational headwinds. But of course, no country is totally immune to this massive swing in global risk sentiment, and balancing inflation concerns with growth concerns and recession concerns.

Can you just take us through some of your key observations about the potential or actual impact of tariff so far for Southeast Asian credits and year to date? And does anything else that you think is worth mentioning? Yeah, so this is a tough time risk, and the exposure is on top of several clients, mine even in Asia. So as soon as Trump came to power, he did announce a slew of threats related to that.

And even some of the South Asian countries were not spared. But as you rightly mentioned, many of them are quite insulated, and I'll get to that in a bit. So the top tariff threats that were changed to some of the South Asian countries or in corporates within them are one is a reciprocal tariff, that yes, mainly targeted at the primary one being India, that is supposed to take effect from second April. The other is at flat 25% tariffs on oil, steel and aluminum that comes into the US, and also a 25% tariff on automobiles.

So with respect to South Asian corporates, one of the pharmaceutical companies are quite at risk because they are both come under the scandal of the reciprocal tariff as well as a flat 25% age of them, pharmaceutical input that will be subject to it. So within India, there is a company called BioCoin Biologics. We don't cover it, but we just debut with a new issue in October last year. So interestingly, we looked at it and they're exposed to 38% of its total revenues from the US.

So this is definitely quite exposed to any tariff in position on pharmaceutical products. When you come to the automobile sector, there is again a company called ATA Motors that exports close to 15% of its total revenues by way of exports into the US. So that will be also impacted by a general imposition of tariffs on automobiles. We need to get a derivative of that any automobile manufacturer from India that exports into the US might face a reciprocal tax because what would be seems to be demand which attracts very high tariffs of close to 25% age on average.

For the actual auto, it is much higher. For any auto that comes from the US into India, whereas on the reciprocal front, the Indian auto can be exported into the US with 0% tax. So with that in mind, the automakers are really under pressure there unless some business truck or if India also agrees to impose a similar tax for sorry, so it appears to impose no tariffs on imports coming from the US. Now, if that happens, not just the automobile manufacturers, the stream makers for the US and India will also be hit as some because of the cascading effect of the lower volumes that the Indian automakers will be subjected to.

So especially the Indian makers like JSW, Tata Steel will be keeping that pace. Finally, the ones which will be exposed to most will also be the poor operators because in general, if there is tariff, there is supply chain disruptions off-shoring of manufacturing that happens in a certain location to some other different location. So there will be a lot of disruptions and uncertainties there and that will in the very, very effective the poor operators, under which we have Adani quotes and Philippine quote called ICTSI under a coverage will be also hit. So these are the companies and the countries that you think that are most at risk for all the others, they are exports or their contribution of their revenues in terms of exports into the US is much less than five percent each.

So it is slow single digit to mid single digits. So we are not really concerned that they will be impacted even if suppose in the future, some of the other tariffs bring some under the scope of our cities. So yeah, so this is what we have concluded in terms of taxes. That is very helpful and just very exhaustive in terms of the analysis.

You did mention Adani and Adani has been one of those companies that you have been really at the forefront. You're one of the first analysts on the street pointing out some corporate governance issues and really that comes up a lot for clients that I'm speaking with in the US. You know, they would love to be investing in India, for example, because demographic trends are on the side of the country and it feels like there's a lot of growth momentum there. But when we think about corporate governance, it is a little bit more challenging.

How do corporate governance issues kind of impact the domestic and dollar funding access for some of these credits? Yeah, corporate governance is one of the key credit factors that usually gets a little push to the background. But when it comes to the emerging markets, such as the ones that we are dealing with, that's quite an important aspect that definitely needs to be looked into. But because it can come just out of the blue and really through all the credit violations out of the blue.

So, financials can be very good, great, but then if a company has support governance, the splits can be very blow up and losses can be incurred. So, with corporate governance, something of such nature gets out to the open. The funding channels are first or the most important thing that gets in bed for the company, because both lenders, investors are really interested in providing the funding access. I will say the one that gets pulled out the most and that is most susceptible to its access getting cut is the dollar-one market.

So, with many of the companies that we have seen that have faced corporate governance, the dollar-one investors are then right from the point of time, quite cautious in providing funds and that channel for all intents and purposes gets cut. Now, how much time it takes to revive that channel that could vary from anywhere between six months to one year or even beyond the pay if that governance issues are the pull of it is not yet resolved. The second important thing is that the overseas banks who provide the dollar funding in terms of loans, that is less accessible but it also depends on the relationship that the company has with certain poor relationship banks. If that is still very solid, then they might get funding but they may not get it to the extent that they want, nor will all the banks whom they have a relationship will still stand by them.

So, suppose there are 10 banks, they were earlier had relationship with, after the governance issues they might only be two or three banks which are willing to provide that. And thirdly, which is a bit more reliable than the other two is the domestic banks who still stand by the company even if a governance issue hits are provided the company has very good reputation in the local market. They have a good brand name that they have built over several years, several decades and they have good relationship with those banks over the good track record of that relationship. Only then they are willing to stick with that company and provide access.

You have seen the couple of couple of points where in the case of Azure Power, in the case of Adani Green also very recently, there was no dollar bond market available, there was no dollar banks willing to lend fresh. But then the domestic banks as well as some of the state-owned financial, social financial, financial, they are backed by the government, not there to provide funding to that sector in particular. They are willing to step in and provide funding in order to, for any refinancing in the near term and to save face for the company. Such an interesting topic.

And we definitely see these governance issues pop up in the US as well when I was on the high yield trading desk and we would do new deal teachers. The first question our sales team always had was, who's the management team? How do we know them? How's the relationship?

And so it really just shows that this business is really built on those relationships and building that trust. So on the new issue side of things, even as there's been a lot of policy uncertainty, macroeconomic uncertainty, new issue markets have done well. We've seen strong investor demand really across the globe and including in South and Southeast Asia markets. And that's for IG companies, state-owned enterprises, and then also high yield and some of these more special situations or situational credits.

You take a lot of looks at these new issues. Do you have any key takeaways? What are your expectations for new supply for the rest of the year? Are technicals still in the favor of corporate spreads grinding tighter?

On the new issues, even when we talk to clients, that's a space that I'm quite focused on because in the secondary market, it's quite tight now and there are very little opportunities to make money there. So new issues are part way for them to deploy funds and to make some returns as these bonds face a little tighter, especially if the IPP's and the final pricing is quite generous. We have a scene that as we mentioned through the course of 2024, for our space in particular, or rather, when we start with the Asia, the supply has been quite limited, particularly off to the collapse of the China property market. And in the two to three years, the barrier to the most very limited supply as the US started to high grades.

Only last year, things started to loosen up a bit, especially when we talked about South and Southeast Asia. We saw new issues coming both for the financing of existing debt and for the new issues coming to the market for the first time. So we do that opportunity. We have written on many of those new issues.

Some means even on some, we are written on some, which we don't have a formal coverage on, and that has quite caught investors and clients attention. When we look at the current year, the issuance is still quite strong. It's we continue the trend since the QQ of 2024. There's a couple of factors there.

One is also that after trunking to power people were a little cautious at the beginning of the year, so there were slightly lower issuance. But then as things started unraveling, they thought that they need to seize any window that is available, and that there was a flurry of issuances in February and March. Now looking ahead, we think that issuances in Indonesia might pull back a little bit, given all the macro uncertainty and therefore the investors' hesitance to invest in Indonesia. So that could see some pullback.

But otherwise, we still think that a couple of state-owned enterprises like Urduvina Geo Thermal, which has a very large apex outlay, might be forced to tap the market at some point of time. There are a couple more other SOPs, but they might come in much later during the year. Hopefully, it takes a little bit down in the macro environment. Outside of Indonesia, there is this SFC Global Power, which would also tap the market since it has successfully recovered itself, because just a year ago, it was in a stressed situation.

But now it is doing quite well with a slew of refinancing. So that might continue to re-take some of its upcoming dollar groups. In India, the Indian renewable space is something that's really watched out for. They have a lot of apex.

Recently, Greenbow and India Renewable Company also printed a 3.5 year D. We expect that the likes of Renew Power could also come to the market later during the year. So these are some of the names that we think of who could tap the market for the next few years. A lot to look out for on the new issue side of things.

Another topic that comes up a lot in the US is corporate hybrids. There has been a lot of corporate hybrid issues, especially in the utility space in the US. And outside the US, we've definitely seen a pickup in at least interest in corporate hybrids, as you can get some incremental yields when spreads are so tight. Are there opportunities in Southeast Asia on the corporate hybrid space?

And are there any key considerations that people should keep in mind if they are looking at these corporate hybrids? In Asia, we do have a few corporate hybrids. Some handful of them are under my coverage, under my coverage, in Southeast Asia. They are typically in the form of perpetuous, some senior, some subordinated, and they are usually called in five years with a step up after that not called.

The first part of the question, the new dollar perps from corporate, have mainly come from the main dimension and it usually comes from Philippines. So they're almost 80 to 90% of the dollar perps that are outstanding are of the nature of perpiguals, or hybrids in other words. So here, we have seen that the SMC global power that we just talked about, which is a part of a large conglomerate of under the sand liquid rule, has been a frequent issuer. That's mainly has been done recently for refinancing of its upcoming dollar perps.

The expectation is that it will continue to do so even for this year, since it has a certain world of majorities of dollar perps that are coming for refinancing. So that is expected to still be there. And that's the name and a perp that we still find attractive and we find it's a good opportunity for investors to put their money in. It's yielding about 7.5% each.

It's on a trajectory where it has been able to refinance. And the expectation, our expectation is that it will call back the near-term perps by the first call date. So there will be low non-call risk on the perpiguals. So we're not worried on that friend.

And so, therefore, for a 7.5% age plus deal, it seems attractive. The other perps that is very little to offer, we like the telecom space within our regions because they're quite stable. They're mostly operating in localistic or max-to-max, three-player kind of an environment. So like Rope Tilli-Gong, which is a free-tale company, which is called in 26.

They also like the near-term is an Indian player, also a call-able in pretty good 6. Because they offer like 6% plus or 5.5% plus 10. Now, what investors are trying to mean to me, when it comes to hybrids, are that at the end of the day, they have a very weak bond structure. Even the senior perps, they have very weak terms and deviations.

Distributions or rather, the coupons can be deferred by the issuer. So there are some restrictions on dividend payments, so one that can be tackled by the issuer. The principle also is that there is no fixed life for that. There is first-party button that the issuer has a distinction to not call the bond on that date.

And in some cases, a step up who bonds may also be quite low that may not really incentivize the issuer to call the bond. So in those terms, the terms are very cool. And also finally, the perpicious start at the end of the day, quite high risk-invested bonds. They are usually even rated to not just below the issuer, but they are not even rated.

So investors are going in blind there. So in that sense, it's very high risk and in the market, instead of environment that we have seen in Indonesia, we have seen in across the world, perps are really high risk of getting kids to deal with even whether there is a market-wide set of. So those investments can bear a huge loss of when the result is not. So these are some of the things that investors and clients need to be able to do.

So as always, you should make sure that you know what you're buying before you buy it, especially when you are reaching for yield in corporate hybrids and other types of more creative financing solutions for some companies. Lex, this has been a pleasure. I have learned a lot about South and Southeast Asia corporates. You clearly bring a lot of expertise to the topic.

If anyone has follow up questions, or you can always find him on credit sites.com using the Ask an Analyst function. Lex, thank you so much for joining me today. Yeah, it was a pleasure being a part of this podcast. You're talking to me.

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