Local interest in foreign warrants seems to be waning, as the predicament of the first call warrant issued on a Jakarta-listed company here indicates.

OSK Investment Bank last week delisted the call warrant it had issued on PT Bumi Resources BK, called Bumires-C1, less than four months after listing it on Bursa Malaysia on Feb 3, 2010.

However, this does not come as a surprise because Bumires-C1 was suspended just two weeks after its listing. The exercise to remove the instrument was on the grounds that response to the instrument was poor.

“There was little interest in Bumires-C1. Hence, we decided to delist it,” says OSK head of derivatives and structured products Foo Keah Keat.

A Bursa official says there were no takers for Bumires-C1 from the time it was listed until its suspension on March 1, 2010.

Since the call warrant was offered by way of market making, there was no requirement for a minimum number of holders at the point of listing.

“This was the first request for the delisting of a structured warrant prior to its maturity date,” says the Bursa official.

In February, Foo had told The Edge that the company saw growing interest in Indonesian stocks and that PT Bumi Resources (BumiRes) was a good commodity play and one of the most active stocks on the Jakarta Stock exchange (JSE).

In fact, BumiRes, which is controlled by Aburizal Bakrie, the chairman of Golkar, accounts for about 30% of daily trading volume on the JSE. It is said to be the second fastest growing coal-mining company in the world and is also one of Asia’s largest owners of coal mines, with an estimated output of 45 million tonnes a year.

For FY2008 ended Dec 31, 2008, BumiRes posted a net income of US$372 million on the back of US$3.38 billion in revenue.

OSK’s listing of Bumires-C1 in February garnered a lot of attention because the listing of a structured warrant on an Indonesian stock was new and the brokerage firm was entering unchartered territory.

Sources say OSK had launched Bumires-C1 to test the appetite of Malaysian investors for Indonesian stocks.

“Perhaps the poor demand was because investors preferred direct exposure in Indonesian stocks or maybe they had no interest in Jakarta stocks although the Jakarta Composite Index (JCI) shot up last year,” says a source.

The JCI gained 86% in 2009. YTD, it has gained 6% and closed at 2,696.78 points last Wednesday. BumiRes commands a 2% weighting on the JCI.

Bumires-C1 was issued at 15 sen or about IDR411 apiece and since it was a European-style warrant, investors could only exercise it at maturity. Based on its conversion ratio of two to one and exercise price of IDR2,500, its break-even price is about IDR3,322.

Its expiry was set for Oct 1, 2010, which gave investors ample time to reap a profit on their investment.

In tandem with recent bearish market sentiment, the share price of BumiRes plunged 16% YTD to close at IDR2,050 on the JSE last Wednesday. But considering its liquidity on the Indonesian exchange, its recovery could be fast.

Meanwhile, OSK will lose the licensing fee it had paid Bursa for listing Bumires-C1. Note that  it did not do a placement for Bumires-C1 but undertook a direct listing of the call warrant.

In a direct listing, investors do not buy the warrants until they are listed, thus they would buy based on current market performance rather than a forecast of where the market would be in four or five days. It is understood that in other active warrant markets like Hong Kong and Singapore, direct listing is the typical method of issuance.

Meridian Asset Management CEO Nicholas Ng says the lack of interest in foreign warrants is expected given the current bearish stock market.

“When market sentiment is bad, interest in warrants will dip. Given the short lifespan of warrants, when you’re not in a bull market, the exercise price would probably be on the high side,” he tells The Edge.

Ng Ee Fang, AmInvestment Bank’s director/head of equity derivatives, says the waning demand for foreign warrants is due to a shift in appetite for largely local stocks.

“Investors are more familiar with local names and have better information flow on these names versus foreign names,” she adds.

However, she says, foreign warrants could prove popular again when the time is right.

“At that point we would certainly issue new instruments as our function is to anticipate the needs of the market,” Ng comments, adding that investor interest is focused on Hong Kong or China stocks and some US stocks.

Still, it is unlikely that OSK or any other investment bank will issue new Indonesia-related warrants in the foreseeable future.

However, there are some who say the poor take-up of Bumires-C1 should not be viewed as a reflection of the general response to the Indonesian market because Malaysian investors do trade directly in Indonesian stocks.

As Meridian’s Ng remarks, the fundamentals of the JSE are intact and Indonesian corporate earnings encouraging. He says stock picking is an important strategy when investing in the Indonesian market, which has demanding valuations compared to its peers.

This article appeared in Corporate page, The Edge Malaysia, Issue 808, May 31-Jun 6, 2010