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Saturday December 31, 2011

Growth momentum of sukuk and bonds poised to continue

WHILE there are clouds of uncertainty looming over the global economy, the Malaysian bond market is expected to remain bullish next year, fuelled by the expected implementation of infrastructure projects.

Analysts and observers feel the growth momentum of the sukuk and debt market would continue next year barring any unforeseen shocks stemming from the United States and eurozone debt crisis.

RAM Ratings acting CEO Foo Su Yin says the corporate bond market this year was very robust compared with 2010, with this year's third-quarter issuance by programme value already exceeding that of last year.

Given the underlying positive investor sentiment and stronger roll-out of the Economic Transformation Programme (ETP) projects, the rating agency expects corporate bond issuance in 2012 to rival, if not better, that of 2011.

Foo adds that the infrastructure and utilities, and financial services sectors will continue to dominate the bond market next year.

“Other sectors that we expect to feature strongly include property and real estate, oil and gas, and energy. Similar to 2011, much of the financing for 2012 will be through the issuance of sukuk.

“We estimate the Malaysian Government Securities (MGS) gross issuances to hit RM89bil next year. This year, it was expected to reach RM90bil and with improved investor sentiment on future growth prospects as indicated by the flattening MGS yield curve, the market for public debt appears promising for the coming year,'' she says.

Foo says RAM Ratings also expects private debt financing activities to increase in line with the progress of the ETP projects next year as large, longer-term investments kick off.

For the first half this year, the size of outstanding bonds stood at RM336bil, while the size of outstanding sukuk was RM194bil. Hence, the percentage of outstanding sukuk to total outstanding bonds was 58%. For the same period, a total of 19 sukuk issues were approved, amounting to RM32bil, of which RM24.6bil had been issued.

Malaysian Rating Corp Bhd (MARC) chief executive officer Mohd Razlan Mohamed says for the whole of this year, MGS/Government Investment Issues (GII) issuance volume was expected to reach RM90.2bil, which was almost 50% higher than RM60.5bil issued in 2010.

MARC estimates MGS/GII issuance volume in 2012 to be slightly lower around RM88.6bil, based on funding requirements with respect to maturing securities of RM45.6bil and the deficit target of RM43bil.

He adds that the funding needs of the Government may be higher despite the expressed intent to lower the budget deficit to 4.7% of gross domestic product (GDP) next year from a projected 5.4% for this year.

The figure of RM88.6bil must be viewed as highly provisional in that a more expansionary fiscal stance may be warranted as a result of greater-than-expected deterioration in the global economy, Razlan cautions.

He says new corporate bond and sukuk issuances in the first 10 months of this year stood at RM41bil against MARC's full-year forecast of RM50bil, adding that the actual number is expected to slightly exceed the forecast on steady momentum in issuance activity in previous quarters.

“The financial and infrastructure sectors have dominated bond and sukuk issuance activity in the year to date. As in previous years, high investment grade (AA-rated and above) issues continue to dominate new bond and sukuk issuance, which should persist in the foreseeable future, given the increasingly uncertain outlook for the macro-environment.

“Our provisional estimate for new corporate bond issuance for 2012 is RM45bil to RM55bil, which can increase by another RM33bil from a large sukuk offering to fund the buyout of domestic highways belonging to PLUS Expressways Bhd if the new sukuk financial close occurs next year instead of 2011.

“The bond and sukuk pipeline is expected to be sustained by corporate capital spending and public-private partnership project financing,'' he says.

On the yields and credit spread outlook, Razlan says the weakening external environment will increase the likelihood of a downward shift in the MGS yield curve, and this should boost the safe-haven demand for MGS.

The credit spreads on domestic corporate bonds have not widened in recent periods, he adds. A credit spread is the difference between what a corporate entity pays to borrow and what the government pays to borrow without the risk of default.

The three-year AA corporate spread against MGS of similar maturity now stands at 100 basis points (bps) vis-vis its four-year average of 150 bps, he says, noting that the current level is also well below the peak of 260 bps recorded during the global financial crisis in late 2008 and early 2009.

On balance, Razlan says it appears that there is more room for credit spreads to increase than decrease from the current levels if the economic growth is to sharply decelerate and signs of corporate frailty are to increase.

Although cautious about the prospects of the bond market next year, Bond Pricing Agency Malaysia Sdn Bhd (BPAM) chief executive officer Meor Amri Meor Ayob is equally upbeat of the debt market.

He notes that the total bonds outstanding has been growing rapidly over the past six years.

In view of the upward trend observed over the past few years and the foreseeable massive amount of funds required to finance various projects under the ETP, the Malaysian bond market is expected to grow further in 2012 with the total bonds outstanding likely to exceed RM900bil.

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