Corporate Bonds: An SBN Alternative for Higher Yield?

Note: This article discusses Indonesian financial products and markets. The principles apply globally, though specific products, regulations, and tax treatments vary by country.

You’re comfortable with SBN yielding 6% per year. Then you see an offer for corporate bonds from a major company with a 9.5% annual coupon.

“Wow, 3.5% difference! In 10 years, that’s tens of millions in difference!” you think.

But something bothers you: Why is the coupon higher? Is there a catch?

The answer: Yes. And that catch is called credit risk.

If you’re already familiar with SBN and wondering whether corporate bonds are worth trying, this article will uncover everything you need to know — including risks that are rarely explained.

The answer: yes. Corporate bonds — debt securities issued by companies, not the government.

But before you’re tempted by 8-10% coupons, there’s one thing you need to understand: higher yield always comes with higher risk. There’s no free lunch in the investment world.

What Are Corporate Bonds?

Corporate bonds are debt securities issued by companies to finance their operations or business expansion. When you buy corporate bonds, you’re essentially lending money to the company.

In return, the company promises:

1. Pay interest (coupon) periodically — usually every 3 or 6 months
2. Return the principal at maturity

Sounds similar to SBN? It does. The difference lies in who provides the guarantee.

SBN vs Corporate Bonds: Main Differences

Why Are Corporate Coupons Higher?

Because of credit risk premium — additional compensation demanded by investors for bearing the company’s default risk.

The logic is simple: the Indonesian government can print money or raise taxes to pay debts. Companies cannot. So investors demand higher interest as risk compensation.

The difference between corporate and SBN coupons is called credit spread. The riskier the company, the larger the credit spread.

Understanding Credit Ratings

Before buying corporate bonds, you must understand credit ratings. In Indonesia, the main rating agencies are Pefindo and Fitch Ratings Indonesia.

Pefindo Rating Scale

Simple rule: For retail investors, never buy corporate bonds rated below idA. Even safer if you limit to idAA and above.

Example Issuers and Ratings (Illustrative)

• Bank BCA, Bank BRI, Telkom: Usually idAAA — large blue chip/SOE companies
• Medium-sized listed companies: idAA to idA
• Start-ups or companies with high debt: idBBB or lower

Ratings can change over time. A company that’s idAA today could drop to idA if its financial condition deteriorates.

Risks You Must Understand

1. Default Risk

This is the main risk. If the company goes bankrupt or is unable to pay, you could lose some or all of your investment.

Real example: During the COVID-19 pandemic (2020-2021), several Indonesian companies defaulted on their bonds. Retail investors who bought directly without diversification suffered significant losses.

Unlike SBN which is government guaranteed, there’s no safety net for corporate bonds.

2. Liquidity Risk

The Indonesian corporate bond secondary market is very thin. This means, if you want to sell before maturity, there may be no buyers — or you’ll have to sell at a significant discount.

Retail SBN at least has early redemption mechanisms for some series. Corporate bonds? You’re essentially locked until maturity unless willing to take a loss.¹

3. Concentration Risk

If you buy one company’s bonds, your entire investment depends on one entity. This is different from stocks where you can easily diversify through index funds.

4. Interest Rate Risk

Same as SBN, the market value of corporate bonds falls when interest rates rise. But because secondary market liquidity is low, the impact is harder to manage. To understand this dynamic, read risk spectrum.

How to Invest in Corporate Bonds

There are two main paths:

Path 1: Buy Direct

Requirements:

• Account at a securities company (not a mutual fund platform)
• Minimum capital Rp 5-100 million (depending on bond series)
• Understanding of credit analysis

Process:

1. Open account at securities company (IPOT, Mandiri Sekuritas, etc.)
2. Choose corporate bonds available in primary market (during offering) or secondary market
3. Analyze credit rating, coupon, tenor, and issuer’s financial condition
4. Buy and hold until maturity

Suitable for: Experienced investors with large capital who can perform credit analysis themselves.

Path 2: Via Bond Mutual Funds (Recommended for Retail)

Advantages:

• Automatic diversification — mutual fund holds many different bonds
• Low minimum — starting from Rp 100,000
• Professionally managed — investment manager performs credit analysis
• Liquid — can be redeemed anytime (T+7 business days)

Disadvantages:

• Management fees — expense ratio 0.5-1.5% per year reduces yield
• No guaranteed fixed coupon — returns fluctuate as NAB (Net Asset Value) changes
• Exposed to interest rate risk — NAB falls when BI rate rises

Examples of mutual funds containing corporate bonds:

• Fixed income mutual funds that focus on corporates
• Usually visible from portfolio composition in fund fact sheet

This is the path we recommend for most retail investors.

When Do Corporate Bonds Make Sense?

Worth Considering If:

1. You’re already familiar with SBN and want higher yield with measured risk
2. Your asset allocation is already diversified — corporate bonds are only a small portion of portfolio
3. You choose the mutual fund path to get diversification
4. Your investment horizon matches the bond tenor — don’t buy 5-year bonds if you need money in 2 years

Better to Avoid If:

1. You don’t have an emergency fund — don’t take credit risk before you’re secure
2. You’re tempted by high yields without understanding the risks — 12% yield from a BBB-rated company isn’t a “golden opportunity”, it’s a warning sign
3. You’re buying directly without diversification — one bond default can wipe out years of returns
4. You need liquidity — this money must be able to sit until maturity

A Sensible Allocation

For Indonesian retail investors who already have a strong foundation (emergency fund, SBN, index funds), corporate bonds can occupy 5-15% of total portfolio — through the bond mutual fund path.

Never make corporate bonds the main component of your portfolio. SBN remains the foundation for Indonesian retail fixed-income allocation because of government guarantee.

Conclusion

Corporate bonds offer higher yield than SBN, but not a free upgrade. That extra yield is compensation for real risk — the risk that the company might default on its debt to you.

Summary:

1. Higher yield = higher risk — no exceptions
2. Understand credit ratings before buying — minimum idA, ideally idAA+
3. Bond mutual funds are the best path for retail investors — diversified and professionally managed
4. Small allocation — 5-15% of portfolio, not the main component
5. SBN remains king for Indonesian retail fixed-income

Don’t let the 9-10% coupon figures make you forget to ask: “Who guarantees this payment?”

References

1. OJK (Otoritas Jasa Keuangan — Financial Services Authority). “Indonesia Capital Market Statistics.” ojk.go.id
2. Pefindo. “Corporate Bond Rating Methodology.” pefindo.com
3. Bursa Efek Indonesia (Indonesia Stock Exchange). “Corporate Bond Guide.” idx.co.id
4. DJPPR Ministry of Finance RI. “Government Securities for Retail Investors.” kemenkeu.go.id

Disclaimer: This article is for educational purposes only, not investment advice. Investment decisions remain your responsibility.

Action Steps

Before considering corporate bonds:

1. Review your foundation — emergency fund solid? SBN allocation established?
2. Start with bond mutual funds — avoid direct buying until you understand credit analysis
3. Check credit ratings — never buy anything below idA without professional guidance
4. Keep allocation modest — 5-15% of fixed-income portfolio maximum
5. Match investment horizon — only invest money you won’t need until maturity

Corporate bonds are a valid portfolio component for advanced investors, but foundation first, enhancement later.

Related Articles

• Bonds and Government Securities
• Retail Government Bonds Guide
• Risk-Return Spectrum
• Risk Premium
• Reducing Risk