Bond issuance to slow down in 2017 but better corporate credit quality expected

A view near the Pusat Bandar Damansara station during the phase one of the Sg Buloh-Kajang (SBK) MRT line first day operation. AZMAN GHANI / The Star

KUALA LUMPUR: Gross issuance of Malaysian corporate bonds is expected to slow down this year to between RM75bil and RM85bil, compared with RM85.3bil last year, according to RAM Rating Services Bhd.

In a statement, the country’s biggest credit rating agency said it remained cautiously optimistic about the market in 2017.

“Gross issuance could reach the higher end of RAM’s projected RM75bil-RM85bil range, backed by a potential delicate recovery in GDP growth (forecast at 4.5%), numerous national infrastructure projects in the pipeline and the overnight policy rate holding steady at 3.0%,” it said.

On the downside risks to its forecast, RAM said these include the pace of the US interest rate hikes and trade policy direction as well as China’s growth performance.

The agency, which announced the release of its annual Corporate Default and Rating Transition Study, said negative rating actions still reigned in 2016 among its portfolio, with downgrades trumping upgrades by 5 to 1.

“However, the pace of downgrades appears to have slowed down compared to the last two years, signalling the easing of credit deterioration and nascent signs of economic recovery, albeit delicate, in the fourth quarter 2016,” it said.

RAM said that while downgrades might still exceed upgrades in 2017, it expected downgrades to be contained and the rating drift to gradually improve towards neutral territory by end 2017/2018.

It noted that the magnitude of rating downgrades was less severe last year, with an average downgrade of 1.4 notches versus 2.1 notches the preceding year.

As at end-2016, about 92% of RAM’s rated entities had a stable outlook on their long-term ratings.

“Of this, some 35% carried AAA ratings while nearly half were AA-rated. This underscores the strong credit quality of the companies under surveillance,” the agency said.

RAM pointed out also thay one issuer defaulted in December, ending the no-default run of the last three years.