AFTER a dry spell in 2009, the Malaysian debt capital market is set for a rebound this year. This follows an uptick in bond-market activity since the second half of last year and as the economic recovery gains traction.
The uncertainties weighing down the health of the domestic economy throughout last year had, undoubtedly, influenced overall market sentiment. This had been apparent in the pricing hurdles and investors’ diminished risk appetite; the market only favoured debt papers with at least double-A ratings.
The rated value of newly issued private debt securities (PDS) came up to RM61bil last year.
Of this, RM46.9bil was rated by RAM Ratings, about 77% of the rated market.
Nonetheless, actual fresh PDS issuance amounted to RM20.8bil – a 31.8% year-on-year (y-o-y) drop amid the bleak economic and investment landscapes last year.
Looking ahead, however, RAM Ratings expects RM55bil to RM60bil of gross corporate and sukuk issues this year.
In contrast to the subdued bond market, the growth of the sukuk segment remained resilient last year.
Sukuk issues made up 68.1% of the total rated PDS while actual sukuk issuance summed up to RM9.6bil (about 9% higher y-o-y).
Last year, RAM Ratings rated three new sukuk issues with a total programme value of RM31.5bil. Of this RM5.25bil had been issued by end-2009.
We note that this market segment had been boosted by two large sukuk programmes valued at RM30bil in aggregate.
These included the RM20bil Islamic Medium-Term Notes/Islamic Commercial Papers Programme by Pengurusan Air SPV Bhd, which was assigned respective long- and short-term ratings of AAA (with a stable outlook) and P1 by RAM Ratings.
The SPV had been set up as a wholly owned subsidiary of Pengurusan Aset Air Bhd (PAAB), to undertake the financing of PAAB’s acquisition of water assets. This transaction represented the largest rated Islamic issue in 2009.
RAM Ratings’ portfolio of new issues in 2009 was driven by financial institutions raising funds from the bond market to better manage their capital requirements.
Last year, we published the ratings of nine new PDS issues from financial institutions, with a cumulative programme value of RM12.1bil, of which RM6.8bil had been raised as at end-December 2009.
In 2008, there was an influx of foreign issuers tapping the ringgit bond market, driven by our attractive rates and ample liquidity. RAM Ratings’ pool of foreign issuers is dominated by financial institutions from South Korea.
While foreign interest has diminished somewhat as rate spreads have narrowed and advanced economies’ liquidity positions have improved, the ringgit bond market will remain an attractive fund-raising avenue and for investors’ diversification purposes when the window of opportunity opens again.
Despite the challenging environment last year, RAM Ratings achieved yet another significant milestone by having rated the Sabah state government’s PDS issue of up to RM544mil, offered in December.
This bond issue carries an AAA rating, with a stable outlook and marks the country’s maiden issuance by a state government.
The domestic bond market, which has generally attracted corporates and financial institutions, has now come under the radar of state governments wishing to raise ringgit bonds as a source of funding.
In this regard, RAM Ratings’ chief executive officer, Liza Mohd Noor, highlights the need for a Public Finance Ratings Group to keep up with the evolution of the bond market.
This relatively new unit, which was set up early last year, provides country-assessment reports in conjunction with state and foreign issuers, and complements RAM Ratings’ existing specialisation vis-à-vis corporates and financial institutions.
Meanwhile, CIMB Investment Bank Bhd (CIMB IB) took the top spot in the RAM League Table for 2009 – in terms of both programme value and number of issues; AmInvestment Bank Bhd came in second ahead of RHB Investment Bank Bhd in terms of programme value.
CIMB IB also retained its pole position in the RAM League Table for Sukuk Issues last year, with a programme value of RM26.5bil and four issues under its belt.
As global economies have begun showing signs of stabilisation, RAM Ratings expects Malaysia’s GDP growth to come in at 4.9% this year on the back of increased domestic spending arising from continued government expenditure and private consumption, a gradual recovery in global demand, and accommodative monetary as well as fiscal policies.
From a macroeconomic perspective, Malaysia’s bond market hinges on the ongoing rollout of the various stimulus packages and allocations under Budget 2010.
We also expect government-related infrastructure projects and banks’ capital-raising efforts to account for the bulk of the debt capital market’s activity this year.
Conducive fundraising conditions and a brighter economic outlook will also encourage corporates to seek additional funding to fuel their growth.
With external conditions going back to normal, domestic economic recovery, and expectations that Bank Negara Malaysia will keep benchmark rates intact until the second half of this year, Liza believes that it is time for corporates to raise funds, be it new funding, refinancing or building up their war chests.
In the meantime, the much-awaited debut of PDS issues with a financial guarantee or Al-Kafalah guarantee from Danajamin Nasional Bhd (rated AAA/Stable/- by RAM Ratings) is expected to boost the growth momentum of the bond market, by restoring investors’ confidence in lower-rated investment-grade papers.
RAM Ratings believes that the financial guarantee from Danajamin will facilitate access to long-term funds for deserving companies in key economic sectors, although these corporates may not possess exceptionally high stand-alone credit ratings.
Nonetheless, the effectiveness of Danajamin’s operations remains to be seen, as the market anticipates the roll-out of its first guaranteed PDS issue.
Meanwhile, banks, which had tightened their credit policies at the height of the global financial turbulence, have now returned to the market with competitive borrowing rates while balancing their risks with a selective clientele of good credits.
RAM Ratings’ deputy chief executive officer, Chong Kwee Siong, believes that it is essential for corporate to diversity their funding options.
Other than equity and bank loans, the bond market provides an alternative source of financing.
For this year, RAM Ratings has a favourable view of rubber-glove manufacturers and support services for the oil and gas (O&G) sector.
The resilience displayed by the O&G sector last year was expected and we remain upbeat as Petronas has reaffirmed its upstream commitments up to 2012.
Rubber-glove makers have been largely unaffected by the recent economic crisis, given the products’ non-cyclical nature. Due to its close correlation with the healthcare segment, the rubber-glove sector had experienced strong demand amid the H1N1 pandemic.
As for the financial sector’s liberalisation, RAM Ratings opines that there will be keener competition ahead.
We may well see more new concepts as the Malaysian sukuk market has already notched up several “firsts”.
Foreign banks coming on to Malaysian shores are likely to first build up their reputation in corporate banking as a quick way to break even, before preparing to establish a retail presence.
More information on RAM Ratings’ credit and sectoral perspectives for this year will be made available upon the publication of our annual CreditPulse and Banking Bulletin next month.
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings.
The credit rating also does not reflect the legality and enforceability of financial obligations, transfer and convertibility risks, repatriation risk, currency risk or any other risk apart from credit risk.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc.
The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes.
In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings.
Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
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