Lower-rated bond issuers need boost

  • Business
  • Tuesday, 16 Jul 2019

The amount of negative-yielding bonds globally have jumped 47% to more than $12 trillion this year as signs that the Federal Reserve and the European Central Bank will ease spurred a bond rally.

KUALA LUMPUR: Market makers must be created to spur greater liquidity in the Malaysian bond market, particularly for lower-rated issuers, a bond conference heard yesterday.

Danajamin Nasional Bhd CEO Mohamed Nazri Omar mooted the idea in response to Securities Commission (SC) chairman Datuk Syed Zaid Albar’s concern on the need to widen credit spectrum.

For context, a market maker or liquidity provider is a dealer who stands ready to buy or sell securities or other assets at specified prices at all times.

Mohamed Nazri said that companies with single A rating and below find it difficult to raise funds through debt papers as investors in the local market prefer triple-A rated issuers.

“The concern of the investors is not so much on credit, but rather liquidity. If I am an investor, I must have the ability to sell the bonds anytime I want and not wait until maturity.

“If I am the only one in the market but there is no one to buy the bonds from me, then there’s no liquidity. Given such a situation, I may have to sell at a loss.

“This is why many single-A rated issuers cannot get financial close, simply because there is no liquidity in the market for bonds with such ratings. Liquidity will create the ability to price the bonds better and also creates transparency,” he told reporters during the Engineering the Future of the Malaysian Bond & Sukuk Market conference jointly organised by RAM Holdings Bhd and the Securities Industry Development Corp.

With the interest of investors skewed more towards the triple A segment currently, the presence of market makers could increase the much-needed liquidity for the lower-rated bond issuers, according to Mohamed Nazri.

Asked whether the government should intervene to establish the market makers, Mohamed Nazri said that “it is best for the market to decide on how best to do this”.

“We need to set some players, maybe with the government players as well, to do market-making and to encourage buy-and-sell activities in the secondary bond market,” he said.

Speaking to StarBiz, Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid agrees on the suggestion to form market makers for the lower-rated issuers.

“It makes sense. This is because we need to have an effective price discovery mechanism for this particular segment.

“Therefore, without sufficient liquidity, the prevailing bond yield may not reflect the level of credit risks. This would deter investors’ appetite to invest,” he said.

Earlier in his special address, Syed Zaid said the credit profile is relatively narrow, despite the depth of the Malaysian bond and sukuk market.

“This has important policy implications as the inability of lower-rated issuers to access the bond market may result in an inequitable two-speed financial system, where lower-rated issuers face constraints in accessing both market based and non-market based financing.

“This may impact the ability of Malaysia’s emerging corporates to scale up and grow into future blue-chip companies,” said Syed Zaid.

He said market-based solutions are required to deal with the issue to avoid potentially adverse long-term implications for the capital market.“For such issuers to come to the market, they must be confident that sufficient demand exists from investors with the necessary risk capabilities and appetite for non-investment grade papers,” said Syed Zaid.

As at end-June 2019, out of the RM1.49 trillion outstanding bonds and sukuk, about RM384bil worth of debt papers were rated as investment grade.

For context, the investment grade ratings are AAA (highest quality) until BBB. Any rating below BBB is considered as non-investment grade.

On the outlook of the Malaysian bond and sukuk market for 2019, RAM Holdings chairman Tan Sri Amirsham A. Aziz told the conference that corporate issuance activities are expected to reach RM90bil to RM100bil by the end of this year.

“This is not too far away from the RM105.4bil we achieved last year. Bond market activities have remained healthy so far in 2019,” he said.

In the first six months of 2019, about RM78.4bil has been raised despite the periodic bouts of volatility in the broader market.

“The Malaysian bond and sukuk market continues to demonstrate its importance as a key pillar in our capital market, financing the real economy and the infrastructure needs of the country,” said Amirsham.

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