Malaysia debt markets report: conventional markets

Another rule of the moment is that simplicity is the way to go. “For conventional bonds, the simpler the better,” says Chay. Islamic finance can get away with (and indeed requires) a greater degree of structural complexity, but for vanilla bonds structuring is discouraged. In this environment it will be interesting to see how the Cagamas deal – which is a securitisation, and a large one – fares since it combines a feature the market likes (state backing) with one it doesn’t (structuring, and tenors up to 20 years).

While investors are being selective, in absolute terms Malaysia liquidity has some important fundamentals underpinning it. “Demand for investment is still there: insurance companies are generating premium and they still have to get their money invested,” says Shamsun Hussain, head of product management at CIMB Islamic.  “Pension funds are still collecting money and still have to chase investment. They might be more selective but those needs are there and that continues.”

For investors, there is disappointment and opportunity. “The credit spread has widened considerably which presents both good and bad news,” says Soo. “The bad news is the mark to market positions of the fund managers and insurers will be challenging for them. The good news is that once the market has settled, bond issues are expected to come out at much wider levels. AAA bonds are coming out at MGS plus 80 to 100 basis points where it used to be 40 to 50. This translates to a much better return for investors.”

Spreads suggest concerns about liquidity and credit, but Soo thinks the credit side is not the problem it once was. “Unlike 97, where some bonds issued by very large companies went into default, this time around the corporate gearing in Malaysia is much lower and the country has much stronger reserves. It has been accumulating continuously for the last seven years.” Indeed, he cites a recent survey which ranked Malaysia 13^th in the world in terms of foreign reserves. It’s true that Malaysia’s budget deficit is widening, something that has been reflected in government bond yields recently, but it doesn’t combine it with a trade deficit as is the case in the US.

Perhaps with the challenges for lower rated credits in mind, the Malaysian government in March announced a RM15 billion guarantee mechanism for bonds. Specifically, an institution will be set up by Bank Negara Malaysia “to provide credit enhancement to companies that intend to raise funds from the bond market,” with an initial capital of RM1 billion to be raised to RM2 billion in time.

“The government has come in quite strongly to support the debt capital market in Malaysia,” says Badlisyah Abdul Ghani, CEO of CIMB Islamic. “They are providing this guarantee to enhance the market at an uncertain time. So Malaysian issuers who might not be rated as well as they would in normal circumstances can be eligible to get that guarantee and so get better pricing.”

There is, though, some uncertainty as to how and when this kicks in. IFR Asia understands the institution will help not only sub-investment grade but investment grade rated companies to access the market, and that the guarantee will come from a sovereign or quasi-sovereign who, like similar institutions elsewhere in the world, will charge a fee for applying its AAA rating to the issuer.

It’s not clear, though, who it applies to. “The question is, what rating category will be guaranteed and what cost will be involved?” asks Tan at OCBC. “It will probably be for lower rated companies, and the question then for them is, is it a better alternative or would the loan market be able to afford them better funding terms?”

Soo adds: “It is challenging to decide on who is deserving of this credit enhancement. Do you give it to the automotive industry, to preserve jobs? Or to companies that will promote exports, investment in technology, commodities, oil and gas?”

Which sectors does he think it should go to? “One major concern is the export and manufacturing sector,” says Soo. “The base commodities, like palm oil or oil and gas, will continue to contribute to the economy, but the one critical part to provide jobs to people – manufacturing – is badly affected. We export to Europe, America, India, China; these markets are not importing.” So if the government made it easier for these sectors to raise money for longer term investment, it would be helpful. “These are very tough questions and I’m sure the government is deliberating all these issues.”