Virus impact may trigger more downgrades for bonds

  • Corporate News
  • Saturday, 28 Mar 2020

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PETALING JAYA: The coronavirus (Covid-19) pandemic, coupled with global headwinds, may trigger more downgrades in the domestic bond market this year.

Fixed income analysts told StarBiz that despite the possibility of more downgrades than last year, the chances for higher bond defaults remain slim at this juncture.

They added that much would depend on the duration of the pandemic and how it impacts the global and local economies.

“If the Covid-19 outbreak prolongs and the movement control order (MCO) drags on in addition to low crude oil prices, this will paint a negative picture for the domestic economy..

“Given this scenario, more downgrades for bonds will be in the pipeline.

“Having said that, the strength and the financial profiles of bond issuers are currently strong compared to that of the previous financial crisis. The capital market is more dynamic and vibrant now, ” a bond analyst noted.

Malaysia’s economy is set to grow at its slowest pace since the 2009 financial crisis as it struggles with a trio of troubles: coronavirus, oil-price crash and political upheaval.

Analysts from Fitch Ratings to United Overseas Bank Ltd now expect Malaysia’s economy to grow about 2% this year compared with the government’s estimate that gross domestic product (GDP) would expand 3.6%-4%. Bank Negara would be releasing the latest GDP estimation on April 3.

Schroders has projected this year to be the worst year since the 1930s and has forecast the world economy to contract by 3.1% before rebounding by 7.2% next year.

Meanwhile, RAM Ratings noted that “as each crisis in the past – and certainly this pandemic – has had different root causes, it is difficult to draw parallels between them.

“Although the rating drift (ie upgrades net of downgrades and defaults) ended 2019 on a positive note, it may be inevitable to see more downgrades in view of the extraordinarily challenging period ahead – which would turn the rating drift negative in 2020.

“During the Global Financial Crisis in 2008/09, up to 10% of the portfolio suffered downgrades with an average quantum of two notches. Whereas during the 1998/99 Asian Financial Crisis, when the Malaysian economy contracted by about 7%, 60% of our portfolio suffered downgrades averaging three notches.

“That said, the structure of the Malaysian corporate bond market and the financial profile of issuers are substantially different now, with better credits and corporates that are less leveraged and have minimal offshore borrowings, ” the rating agency said.

It noted that while most businesses will be affected to some extent, sectors that are more vulnerable include the tourism, leisure and hospitality, aviation, retail and oil & gas sectors.

RAM’s latest preliminary assessment (as at March 24) affirms that the bulk of RAM’s rated portfolio (80% of which are rated AAA and AA) is likely to have the capacity to meet debt obligations due to sufficient liquidity and/or financial flexibility.

Less than 6% is considered at high risk of immediate credit pressure; these entities are mainly directly exposed to the hard-hit tourism and leisure sector.

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