(Sukuk.net - Arab News) Indonesia's debut $500 million international benchmark sovereign Sukuk launched a few days ago has been oversubscribed to the tune of $3 billion even before the issuance officially closed.

The lead arrangers and bookrunners, HSBC, Standard Chartered Bank and Barclays Capital, have been forced to close the book with no further orders currently being taken. The fact that the five-year Sukuk Al-Ijarah issuance is being marketed at a pricing of a fixed rate return of 9.25 percent, which is much tighter compared with the 11.6 percent for the recent government of Indonesia conventional bond, according to a source close to the issuance, suggests "a new-found appetite for investment in Sukuk and a definite sign of a revival of the global Sukuk market."

This despite the fact that the Sukuk was assigned a "BB-" long-term foreign currency issue rating by international credit rating agency Standard & Poor's (S&P), which is not even an "investment grade" rating. The source also confirmed that although the pricing is currently being marketed at 9.25 percent, there is a possibility that some of the investors may settle at 9 percent at the final allocation of trust certificates.

Despite being a relative latecomer to Islamic finance, Indonesia, the most populous Muslim country in the world with over 210 million people, has been perhaps the most proactive sovereign player in the market in 2009. In January this year, the Indonesian Ministry of Finance issued the country's debut sovereign retail local currency rupiah Sukuk — an offering which raised 5 trillion rupiah ($540 million) from the domestic market as part of its public borrowing requirement.

Similarly, the Bank of Indonesia, the central bank, earlier this year issued four regulations governing the operation of Islamic banks and covering rules on minimum reserves at the central bank; clearing; the creation of an Islamic interbank money market, and Bank of Indonesia promissory notes designed only for Islamic banks, which adopt profit sharing principles.

The debut benchmark Indonesia international Sukuk is being issued by Perusahaan Penerbit SBSN Indonesia I (PPSI-I), the special purpose vehicle set up and wholly owned by the Indonesian Ministry of Finance. PPSI-I will issue trust certificated based on parcels of assets owned by the Indonesian government but transferred to the SPV till maturity of the certificates. The assets will be leased back to the Indonesian government, which will pay a rental to the SPV, some of whose proceeds will be used to service periodic payments to Sukuk certificate holders. The rating on the trust certificates, stressed S&P, reflects the strength of the lease agreement, under which the sovereign as the lessee is obliged to make all payments needed to ensure that the issuer has sufficient funds to pay the certificate holders. "The issue represents the sovereign's first foray into the global Islamic debt market as a source of foreign currency funding. S&P's decision to rate this issue on par with the sovereign's commercial financial obligations takes into account representations of the republic, indicating that all payments under the deal are viewed as equal ranking in priority to other external debt obligations of the republic," explained S&P credit analyst Agost Benard.

While Indonesia continues to improve its public debt and fiscal position, and continues to enhance its external liquidity cushion to about $54.8 billion at the end of March 2009, albeit down from the high of $60.5 billion in July 2008, its ratings continue to be constrained by its external debt position and its vulnerability to external shocks and adverse exchange rate movements. Indonesia's net external debt burden (including liquid assets), at an estimated 40 percent of current account receipts in 2008, is higher than that for most similarly rated countries.

However, the encouraging sign is that general government debt is expected to have fallen to about 32 percent of GDP in 2008, nearly half its level in 2004, owing to consistent primary budget surpluses and strong nominal GDP growth. S&P stressed that Jakarta's 2009 spending plan and associated rise of the fiscal deficit to a targeted 2.5 percent GDP do not represent a weakened commitment to fiscal prudence, and that the public debt ratios will remain on an improving path.

But infrastructure shortfalls, legal uncertainties, corruption, and labor market rigidities will continue to detract from Indonesia's creditworthiness. As such, a key challenge for the government is to maintain support for ongoing reforms and to ensure that momentum is maintained beyond the country's April elections.

Judging by the massive oversubscription of the Indonesia global sovereign Sukuk offering, investors from the region and the Middle East are giving Jakarta the benefit of the doubt. The Jeddah-based Islamic Development Bank (IDB), for instance, is subscribing a hefty $100 million (or 20 percent) of the issuance. The IDB is also the Shariah structuring adviser to the Indonesia benchmark sovereign issuance.
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