Malaysia debt markets report: conventional markets

IFR Asia Malaysia debt markets report, April 2009

“Last year,” says Chay Wai Leong, managing director at RHB Investment Bank, “was a year of two halves.”

 In the ringgit debt markets, the first half was much more palatable than the second. “In the first half we were launching a deal every three weeks: in April alone there was RM10 billion of deals launched, and investors had to choose which ones to go in,” Chay recalls. “But the second half, when things were really bad, it completely dried out. Nobody wanted to do anything, with issuers and investors all sidelined.”

Today, the environment in the ringgit debt markets is halfway between those two extremes. Deals are getting done, but very selectively. “Yields have widened a lot, and although interest rates have come down the spreads are widening as risk aversion has increased,” says Chay. “Only very select deals are being done.”

Specifically, deals are being done for the very top end of issuers. “For the bond market in the first quarter, we are seeing limited supply, and it’s confined to the triple A rated and government-guaranteed bond transactions,” says Seohan Soo, head of debt capital markets at AmInvestment Bank, referring to the Malaysian RAM scale of ratings. There’s no shortage of supply there, thanks partly to the ambitious RM60 billion stimulus package announced by the federal government. “This package has to be funded,” says Soo.

Recent months have been full of examples of this state-backed funding, such as the RM1.5 billion five-year sukuk issue for Pernerbangan Malaysian Berhad (PMB) launched in mid-March through AmInvestment Bank, CIMB and HSBC. This deal was 4.25 times subscribed, was upsized from RM1.2 billion, and tightened its pricing (to 49 basis points above Malaysian government securities) during marketing – none of them characteristics of a troubled environment. But PMB, a state aircraft leasing company that is the majority shareholder in Malaysia Airlines, was aided by being government guaranteed and also for making its bond Islamically compliant, broadening the available investor base.

“PMB was able to fund at a more competitive price compared to accessing the direct cash market in US$ terms,” says Soo. “There are opportunities for issuers like that.” A similar deal was completed on March 6 for Sacofa, which is a telecom tower company backed by the Sarawak state government. The M$400 million MTN issue, through a special purpose vehicle called Pinnacle Tower, was again helmed by AmInvestment Bank, this time alongside Maybank, and came in seven tranches from one to seven years. Again, it’s triple A rated. “These deals are doable in the market and have been quite well received,” says Soo.

The true depth of the market will be tested by an almost RM2.2 billion deal for state mortgage group Cagamas as this guide goes to press, but at this level of rating seniority, demand seems strong.

Still, markets are clearly tough, and a few rules of thumb seem to apply to new issues. For a start, getting deals away has required a more pragmatic attitude to building a book. “It’s not like in the past when we announce we’re going to get a billion and bookbuild until we get that billion,” says Chay. “It’s not very useful to do that anymore. We look at it from the investor’s side.” At OCBC Malaysia, head of investment banking Tan Ai Chin adds: “The days are gone in Malaysia where issuing billions in ringgit was the norm even for corporate issuers. Issuer sizes are going to be smaller than they used to be.” Listening to investor views on pricing is increasingly important, Tan says. “There is a gap in expectations on pricing between what an investor and an issuer want to see,” she says. “The gap has been getting wider. Deals can still be done, but getting the pricing right is important.”

Secondly, it’s a moot point just how far down the credit curve one can go before it becomes problematic to get a deal away at all. Again in RAM terms, one lead manager considers AA a minimum and another adds: “High double A.”

“Deals that are badly affected are the ones below AA,” says Soo. “You would find that there are very limited opportunities in trying to access the capital market below that level.”