PETALING JAYA: Many businesses are looking to bank loans for financing given the relatively cheaper rates and the speed to market, says RAM Rating Services Bhd chief executive officer Liza Mohd Noor.
Such trend was not new as similar practices were seen in the previous downturn, she told StarBiz in an email, adding that the corporate bond market was unlikely to bounce back to pre-crisis level anytime soon.
OCBC Bank (M) Bhd director and chief executive Jeffrey Chew said the bonds and loans markets were complementary to meet the different needs of companies, government entities, financial institutions and project-based entities.
“The bonds market will be tapped mainly for long-term fixed-rate funding and the loans market for working capital, trade financing and other mid-term requirements,” he said.
Bond Pricing Agency Malaysia chief executive officer Meor Amri Meor Ayob said from the cost perspective, bank loans were deemed cheaper.
“When we talk about financing of like RM100mil, the crucial factor is cost because a 10 basis points savings would translate into RM100,000. Given shareholders’ interest, any savings would count,” he said, adding that banks’ capital base was larger compared with a decade ago.
Liza said the issuance of conventional bonds and sukuk had slowed substantially amid subdued economic activity, investors’ wariness and pricing hurdles.
As at end-June, RAM had published the ratings of nine corporate bonds with a prospective issuance value of RM22bil, of which only RM6.8bil were issued.
“Nevertheless, the small number of bond issuances is in no way an indication of lack of interest in the bond market or lack of funding requirements by corporates since we have almost RM60bil worth of rated bonds awaiting issuance,” Liza added.
Meor said while the cost of financing from the bond market might seem “slightly more expensive” at present levels, it came with a certainty of rates.
“Banking rates are linked to overnight policy rates, which may change as the economy recovers. It depends on whether the companies have an outlook of five-, 10- or 15-year, and so forth,” he said. There are some RM111.8bil worth of bonds, including government issuance, maturing in the next 10 months.
“Corporates without guarantees amounted to RM20.7bil and corporates with guarantee RM2.1bil, bringing the total to RM22.8bil maturing by April 2010. These companies have a choice of redeeming the bonds either by own cashflow or refinancing,” Meor said.
Chew said pricing, certainty of funding and time-to-market were some of the key considerations in choosing the type of financing.
The loans market, relative to the bonds, offers a greater level of certainty in terms of demand and pricing.
“Besides the cost of funds, banks would price their loans based on the credit standing of the specific borrower using their own internal pricing model,” he said.
Certainty and time-to-market would be more predictable as the financing arrangements were not subject to regulatory approvals and typically arranged on a bilateral basis or syndicated among a consortium of banks for larger financing needs, he added.
Liza said the bond market would remain an essential platform for fund-raising. “The outlook of the Malaysian bond market is of continued growth,” she said, adding that near-term interest was on bonds backed by the Government or insured by Danajamin.
“The market’s persistent risk aversion behaviour indicates that ‘guarantee’, or triple-A rating, will remain the theme of the domestic bond market,” she said.
With interest rates at historical lows and expectations of stabilising economies in the coming months, investors may start looking for “yields” instead of “safety.”
This could start to re-establish market interests in a broader range of credits, Liza added.
Meanwhile, a source from a listed company said applying for bank loans was not as easy as it seemed based on the company’s experience earlier this year.
“After assuring us for months that there would be no significant issues in offering us the term loan facility, the bank, which is one of the biggest in the country, at the last minute inserted a new term in the offer letter,” the source said.
The extra condition involved placing fixed deposits equivalent to the amount of the facility outstanding for the whole loan period, on top of a charge for the property that the loan was supposed to finance.
“It is effectively asking us to give the bank the money to lend to us. Had we not had the internal financial resources to pay for the purchase, it would have been a financial disaster to us,” he said.
Sourcing from the bonds market, meanwhile, is not economically viable for small amounts. “Private debt securities give companies an alternative and while there is less compliance requirements, the repayment terms and interests charges are usually fixed and non-negotiable,” he added.
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