Huge drop in bond issuance

  • Business
  • Thursday, 11 Dec 2008

PETALING JAYA: New issuance of corporate bonds has dropped dramatically this year as the bearish economic outlook quells the sentiment of issuers and investors alike.

According to Bond Pricing Agency Malaysia Sdn Bhd chief operating officer Meor Amri Meor Ayob, the lack of confidence and limited visibility over the next six months are keeping companies away from the private debt securities (PDS) market.

“Unless companies are confident they would be able to generate returns in the next six months from their investments, they’re unlikely to want to raise additional capital,” he told StarBiz in a telephone interview.

On the demand side, investors’ interest is deterred by rising default risk amidst the gloomy economic environment.

Meor Amri said “the old formula” of the Government taking the lead would help recapture interest, as public spending would increase the velocity of money.

For example, infrastructure projects by the Government are likely to prompt successful contractors to raise capital from the debt market. “As a viable contract backed by the Government, it will have high likelihood of attracting potential investors to take up the bonds,” he said.

The secondary bonds market, meanwhile, remains in the doldrums as trading liquidity is low particularly for PDS.

Meor Amri said trading was mostly focused on Malaysian Government Securities (MGS), as investors “fled to quality” given the higher level of default risk attached to corporate bonds.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said the recent move by Bank Negara to reduce the overnight policy rate (OPR) did not necessarily reduce bond yields, as it also took into account the credit risk premiums and inflation risks.

Nonetheless, lower yields would translate to lower cost of financing for new issues and the secondary bond market, which could boost supply, he said.

Kumpulan Sentiasa Cemerlang Sdn Bhd partner and head of research Choong Khuat Hock said yields for MGS had come off while triple A-rated bonds were flat. Lower rated bonds were badly hit with high yields as investors placed a huge premium due to the higher risk of defaults.

Choong said corporate bonds, particularly the export and manufacturing-related ones, would face increasing difficulty for credit as banks became more reluctant to lend, exacerbated by the inability to raise funds from the debt capital market.

Factories were shutting down as indicated by the downward trend for electricity production, shown in September’s industrial production index.

Choong said it might be a concern that Malaysian banks were holding a large portion of bonds in their investment portfolio.

Last month, banks were allowed to reclassify these investments to held-to-maturity from held-for-trading previously.

Choong said the exposure posed a risk especially when default rates started to accelerate next year as the global economic conditions deteriorated further.

“It doesn’t help to hold it to maturity as it’s only delaying the problem. When default happens, the bonds will be worth nothing,” he said.

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