Singapore set to suffer Indonesia's debt defaults as well as its haze

A man holding a stack of Indonesian rupiah notes.
A man holding a stack of Indonesian rupiah notes.PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Singapore's bond market is bracing for the latest unfortunate export from Indonesia: debt defaults.

Singapore is feeling the side effects of a plunging rupiah, Asia's second-worst performer this year, following two dollar bond defaults in Indonesia, as Southeast Asia grapples with a slump in commodity prices. The island, often viewed as a barometer for growth in Southeast Asia, narrowly skirted recession when its economy grew just 0.1 per cent in the three months through September. Now, its capital markets are being tested.

Indonesian phone retailer PT Trikomsel Oke's Singapore-dollar bonds plunged to record lows last week after it blamed a weak rupiah when flagging a possible bond restructuring that would be the local market's first in six years.

"What makes Trikomsel's situation unusual is that such defaults or debt restructurings have been extremely rare in Singapore's corporate bond market," said Xavier Jean, a Singapore-based director of Asia Pacific corporate ratings at S&P, which doesn't rate the Indonesian company. "Whatever the outcome, funding costs in Singapore's domestic bond market appear set to rise and investors will become more selective."

Trikomsel last week said it can't service its debts indefinitely and wants to restructure $215 million of notes. That signals more pain for Singapore issuers amid poorer returns from debt-funded spending binges as costs rise with the US dollar, S&P said last week.

A Trikomsel default would mark Singapore's first bond failure since Celestial Nutrifoods Ltd. and Sino-Environment Technology Group Ltd. skipped repayments in 2009.

Trikomsel and its adviser FTI Consulting will hold a call with bondholders on Oct 26 to explore restructuring options before the next semi-annual coupons come due in November and December.

Singapore's local currency market is the destination of choice in Southeast Asia for Indonesian companies, with one Malaysian ringgit issue being the only exception. They've sold seven notes with a total of $710 million outstanding, and five are due by 2018.

Indonesian coal miner PT Berau Coal Energy was the only Southeast Asian company to default on dollar bonds this year while peer PT Bumi Resources was the region's sole issuer to miss a payment in 2014, according to data compiled by Bloomberg. The nation's companies were last month at their most vulnerable to failures since May 2010, according to an index compiled by the National University of Singapore.

It's not all bad news. The arrival of Indonesian defaults may actually help pricing become more efficient in Singapore's local market, according to Emir Hrnjic, the director of education and outreach at NUS's Centre for Asset Management Research and Investments.

"The lack of empirical data on defaults may impair market participants' ability to price default risks," Hrnjic said. "Hence, the side effect is that this potential default may contribute to better pricing of such risks."

Indonesia's rupiah has lost 9.2 per cent this year, with Asia's only worse performer being Malaysia's ringgit, down almost 18 per cent. They're the biggest casualties from the collapse in oil and coal prices that drove the region's currencies to the lowest level since Lehman Brothers went bankrupt in September 2008.  Trikomsel's $115 million of 5.25 per cent notes due May 2016 were bid at 75 cents on the dollar on Tuesday (Oct 20), according to DBS Bank prices. Its $100 million 7.875 per cent notes maturing June 2017 were at 70 cents. The three-year securities were each sold at 100 cents on the dollar.

"The reality is that in the short term a restructuring of a Singapore dollar bond will create stress and volatility,'' said Clifford Lee, the head of fixed income at DBS Group Holdings. "It's not the first time the market has undergone stressed credits. It will shock the market, but it won't derail it entirely."