Bank Indonesia released rules requiring the
country's corporates to hedge their external commercial
borrowings in late October. But more clarity is needed,
according to Asia Securities Industry and Financial Markets
Association’s (Asifma) Vijay Chander.
The October 30 regulations require companies to
hold a certain amount of capital before their external
commercial borrowings come due. They also restrict access to
external commercial borrowings to companies rated above
BB-.
Most have had mixed reactions to these rules. They
demonstrate that Indonesia is conscious of the risks of foreign currency borrowing –
particularly amid a low-interest environment driven by
quantitative easing programmes in the US, Japan and possibly
the EU – but they may also limit borrowing from SMEs.
Industry groups are now considering their next
steps. "These are potentially live issues for which
we’ll be working with our members – in
this case, through the Credit Markets Committee," said Vijay
Chander, executive director of fixed income Asifma.
KEY TAKEAWAYS
- Indonesia’s October
30 hedging rules have prompted mixed reactions;
- It’s
unclear how Bank Indonesia will supervise and enforce its new
liquidity requirement or account for volatile market exchange
rates;
- Blanket restrictions
on companies rated below BB accessing external commercial
borrowings may challenge restructurings;
- The restrictions may
also hinder the growth of the private debt market, which is
usually used by unrated corporates
Liquidity
rules
According to the
regulations, non-bank corporates holding external debt must
hedge 20% of their foreign exchange against the rupiah
beginning on January 1 2015 – in less than a month. On
January 1 2016 that ratio will then increase to 25%. That will
apply to foreign currency assets and liabilities with
maturities of up to three months and those that will mature
between three to six months.
The rules are stricter for debt that will mature within
three months. Throughout the 2015 calendar year, non-bank
corporates holding external debt must provide foreign currency
assets that total 50% of the value of foreign currency
liabilities maturing within three months. And from January 1
2016 that ratio will increase to 70%.
That will obviously pose challenges for corporates. But it
may also be difficult for Bank Indonesia to supervise and
enforce, especially given exchange rate fluctuations.
"It’s unclear how this will be monitored and
reported, as well as what tools Bank Indonesia will have to
track it," said Chander. "Based on market exchange rates,
exposure can start varying, and that’s a concern
as well."
Blanket restriction on ratings below BB
By far the most critical issue that Asifma is focused on is
the blanket restriction on borrowings by companies rated below
BB. "At one level it’s laudable because it
enforces some discipline around external commercial borrowings,
but I don’t know that imposing this requirement is
the best way to go about that," said Chander.
While there is an argument that Indonesia is hoping to
develop its local currency market, local currency debt markets
in many countries have limited liquidity. And sources have also
been concerned about different standards between local and
foreign ratings agencies.
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"These are potentially live
issues for which we’ll be working with our
members"
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There are exemptions that allow companies to refinance their
external commercial borrowings on better terms than where they
borrowed at but those aren’t defined.
It’s unclear whether this will affect
restructuring of Indonesian high-yield bonds. There have been a
number of heavily-scrutinised defaults in the past few months
– particularly by
companies owned by the Bakrie family – and
it’s unclear whether issuers will be able to
refinance their external commercial borrowings on worse
terms.
Private debt
market
Chander noted that there is a large private debt market that
traditionally relied on funding from a mix of banks –
primarily boutique investment banks, private equity houses and
hedge funds. "That entire market could be adversely impacted by
this ruling," he said.
Right now the private debt market isn’t
necessarily active because commodity prices are low and
precious metals miners aren’t accessing the
market.
"But for the most part, they’re unrated and
won’t be able to access the capital markets in the
future," he added.
See
also
Indonesia’s new hedging rules
explained
Indonesia and India regulators limit HY
supply
Indonesia HY covenant trends explained