IFR Asia: Southeast Asian debt capital market review – Malaysia

IFR Asia, December 2009

Malaysia has become one of the region’s most liquid and reliable bond markets. Partly, that’s a function of having the region’s only mature and tested Islamic sukuk market, but the ringgit debt market has also proven itself for conventional issuers – including, to a growing extent, foreign ones.

According to ThomsonReuters data, by November 19 issuers had raised M$42.1 billion in 2009 to that date, already well ahead of the M$38.82 billion in all of 2008 and with an outside chance of matching the M$ 54.94 billion of 2007.

But although the overall numbers have stayed resilient through the crisis, the market has thinned in one sense, in that it has only been highly rated names who have had access. “Up to the Asian crisis in 1997-8, you would see bonds of BBB being traded in emerging markets,” says Seohan Soo, head of debt capital markets at AmInvestment Bank. “After the Asian crisis, for bonds issued anything below single A, there are no takers. And since subprime, we have also lost the ground of the single A market.”

Soo says that in 2009 to date, financial institutions have made up 30% of new issues, and government guaranteed or AAA names 58%, with AA rated issues accounting for 10.4% – this is typically big investment holding companies like IJM and some project financing such as toll roads and power plants. Below that, there’s almost nothing: 0.9%, or M$460 million, from single A rated issues; just M$134 million, or 0.2%, for BBB and below. “The single A market was more or less obliterated after subprime,” says Soo.

It’s not just lower rated names that have stepped back. “We are seeing more high grades, more government guaranteed, more triple A: that kind of issuer,” agrees Thomas Meow, head of debt capital markets and syndicate at CIMB Investment Bank. Lower rated credits and project financiers have appeared less. “We have seen a significant slowdown in project financing, understandably, because the government has been busy tackling the economy and took some time to come out with a stimulus package,” says Meow. “This stimulus plan will take one or two years to come to the market. But this activity will come back: the Malaysian bond market has been funding project finance requirements substantially. In the past 25-30% of the money raised here has been to fund project finance – a major difference between Malaysia and any other regional bond market.”

As the crisis unwinds, aversion to lower rated credits will probably alleviate in time. “I think investors will be cautious,” says Meow. “There will be some growth in trading appetite, it’s tipping back, but I don’t expect it to change overnight.”

In order to help it return, the government set up a credit wrapping agency, Danajamin Nasional, which formally opened on June 30. Danajamin, jointly owned by Bank Negara Malaysia and the Ministry of Finance, was launched with a guarantee quota of M$15 billion to wrap paper from lower-rated local credits in order to access Danajamin’s AAA (from local agencies Ram and Marc) rating, for a fixed fee, and find buyers. Even then, the issuers must have an investment-grade rating from a recognised rating agency in Malaysia.

“Those parts of the economy, the single A issuers, are very important to Malaysia and the government has taken steps to make sure there will be an avenue for these companies to tap the bond market rather than go back to the banks,” says Meow. “I don’t think the government wants systemic risk in the banking market.”

The hope is that Danajamin will give a shot in the arm to the markets, bring back confidence and eventually help create an environment in which single A-rated credits can issue unsupported. “To me, single A is still workable,” says Soo. “When the return is marginalized by the concentration on superior credits, eventually investors should look towards well structured transactions for single A credits for better spreads. It’s a sentiment issue.”

A separate theme in the ringgit markets has been foreigners using it to raise debt. This has chiefly been a Korean phenomenon, and had its strongest expression in 2008: Export-Import Bank of Korea raised M$1 billion in five and 10-year funding in March 2008, followed by M$1 billion from Industrial Bank of Korea the following month, M$650 million for Hyundai Capital Services in May and, the same month, M$530 million for Woori Bank. (Earlier in the year Gulf Investment Corp had raised M$1 billion).

This has been much tougher in 2009, but some deals have got away, most notably a M$1 billion deal for Hana Bank in June, upsized dramatically from a minimum target amount of M$300 million. The deal was guaranteed by the Korean government – a fairly short-lived guarantee program since Korea would prove to be one of the first economies out of recession. “We got the timing perfectly right,” says Chay Wai Leong at RHB Investment bank, the sole lead. “They were the first and the last. Straight after they used it there was a pick-up in the Korean economy and banks not longer needed to use the scheme.”

Critics say that there is a limit to how far this market can ever grow, given the limits available in the swap market. There was a feeling in 2008 that no other issuers, Korean or otherwise, could have come to the market even if they had wanted to because the ability to swap back into dollars or another currency had been exhausted.

Although Korean issuers have regained their access to dollar markets, Chay feels they will recall their positive experience raising funds in Malaysia and that the market has been developed as a consequence. “They very much appreciate this alternative avenue of fund raising,” says Chay. “After its first deal Kexim tapped the market another three times. Malaysia is on the map and it will remain on the map for them because they will remember the dark days when they needed money and there was nobody answering. Malaysia was there to plug the gap.”

The corollary to foreigners coming to Malaysia is Malaysians going overseas, such as Genting building Resort World in Singapore, YTL acquiring a Macquarie REIT also listed in Singapore, and various Malaysian companies acquiring or launching projects in Indonesia. Soo hopes this will drive the domestic debt markets. “What we are hoping to see is that our market becomes a source of capital for our regional investments, not just domestically,” he says. “Our market is too small: our population is 25, 26 million people, compared to over 200 million in Indonesia. The population in Jakarta alone is higher than Malaysia.”

Perhaps that will help get the market up to the level Soo believes it should be. Generally in the region, he says, countries have a ratio of total private debt issuance to GDP of around 100%, but in Malaysia it is below 80% – or around M$600 billion compared to an M$800 billion economy. “So we have M$200 billion to grow.” 

The investor base in ringgit debt varies according to maturity: foreign funds wanting to take a view on the ringgit as a currency play congregate in shorter-dated, one to three year securities; medium term investors like fund managers are active in the three to five year space; and insurers and pension funds dominate at five to 10 years.

Retail does not yet have a significant role to play – certainly nothing like Thailand – but there are moves towards changing that. Bursa Malaysia, the stock exchange, has been pushing to get bonds, and in particular sukuk, listed on it. Petronas and Cagamas, a special purpose vehicle of the Malaysian housing mortgage corporation, have led the way, with Cagamas starting out by listing all outstanding sukuk and bonds under its five residential mortgage-backed securitizations, amounting to M$4 billion. This follows a new rule that took effect on August 3, called an exempt regime basis, allowing the listing of sukuk and bonds on debt securities on the exchange, but in a non-tradable form. “Investors want transparency, they want governance,” says Raja Teh Maimunah Raja Abdul Aziz, head of Islamic capital markets at Bursa Malaysia. “I’m pitching that one way you can offer it is to come through an exchange: then you get regulated, reporting is required, and if any issues come up the stock exchange will take them on. Retail investors would soon appreciate that issuers are offering themselves to be regulated, and the issuers will get better pricing.” She has said she would like to see a retail trading regime for sukuk.

As far as sukuk goes, the market is widely recognised as the most mature local Islamic market in the world, by a distance. As of September 2009, there were M$168 billion of outstanding sukuk, accounting for 57.7% of all outstanding corporate bonds. If anything, the relative strength of this market on a world scale is getting more pronounced as Middle Eastern economies, particularly the prolific issuers of sukuk, have flagged and in some cases experienced defaults. “Malaysia has undoubtedly been the standout market for the last 20 years,” says Soo.

BOX: KEY DEALS

Key transactions in 2009 have tended to be government-guaranteed or highly rated. An example is the M$2.5 billion deal for Pengurusan Aset Air (PAAB), led by CIMB, upsized from M$2 billion in October. This included one year, five year and 10 year pieces, all off a M$20 billion MTN programme, and rated AAA.

The background to this deal is what makes it interesting. PAAB was set up in 2006 as a wholly-owned company of the Ministry of Finance as part of an attempt to restructure the country’s water services industry. PAAB was launched to acquire all the water assets in the country owned by state government or private water operators, with the MTN program funding the purchases.

“In the past few years, al water projects in Malaysia were funded in different ways, some with bank loans, some by the state, some through the bond market,” says Meow at CIMB. “So the privatization by the state of these assets was a problem the central government needed to solve. A new financing model needed to be put in place.”

Meow adds: “On the surface you can look at it as a bond issue, but behind it is a new private financing model that came out of the process. It allowed them to come up with a more efficient cost of financing by piggybacking on the government’s ownership,” giving it a AAA rating. “It allows the government to provide a very competitive water tariff plan.”

Another significant deal was the M$5 billion, 30-year Islamic raising for 1Malaysia Development, which at the time was known as Terengganu Investment Authority (TIA). 1MDB, as TIA is now known, subsequently set up a joint venture with PetroSaudi International in order to invest in strategic projects in Malaysia and the region.

The bond, led by AmInvestment Bank, was the first ever 30-year issue from Malaysia. “If you look at the region, not many countries have a yield curve above 10 years, never mind 20,” says Seohan Soo. “Malaysia has 20-year government securities, but we did a 30-year government-guaranteed bond, well beyond benchmark government issues. These are the things that separate our market from the rest: we have arguably the longest yield curve in the region.”