IFR Asia Malaysia report: debt

IFR Asia Malaysia report, May 2010: Debt

Malaysia has one of the region’s largest local currency bond markets, second only to Korea in ex-Japan Asia. RM52.4 billion, or over US$16 billion, of private debt securities were issued in 2009 – a 7.8% year on year increase, more than double the amount raised in Hong Kong and triple that of Indonesia, Singapore or the Philippines.

“2009 was a good year of recovery,” says Seohan Soo, Director and Head of Debt Capital Markets at AmInvestment Bank. “Despite a GDP contraction of 1.7% in Malaysia we managed an increase of 8% from the year before in the local bond market. This was a result of stimulus measures by the government of Malaysia coupled with the low interest rate environment in the local market.”

Market players and rating agencies locally were hoping for a strong 2010, with approximately RM55 to 60 billion of PDS for the year, but if that’s going to happen it certainly didn’t come at the start. Only  RM10.6 billion was raised in the first quarter of the year. “It is somewhat lower than expected,” Soo says. “That is a bit of a disappointment.”

Still, issuance appears to be picking up after a slow start. In April Bank Pembangunan Malaysia raised RM2.5 billion in an issue of three- and five-year government guaranteed notes, the largest bond issue so far this year, through CIMB and HSBC. Like most Malaysian debt deals, it was Islamic. In other important deals in recent weeks, Danga Capital – a subsidiary of Khazanah, the investment arm of the Malaysian state – raised RM2 billion in a five-year bond issue, also Islamic, off a RM10 billion Islamic MTN programme; UOB raised RM500 million in a lower tier two issue of 10-year non-call five bonds, the first lower tier two issue of the year; and Digi Telecommunications priced a RM250 billion five-year MTN issue.

“This year the banks are going to the debt market,” says Chay Wai Leong, managing director of RHB Investment Bank, who like many hopes for a good year for bonds. “Issues are getting good pricing and reception. There’s a lot of interest because investors are generally quite bullish on the currency, and are getting exposure through the bond and equity markets. There’s lots of demand for paper.”

In some respects Malaysia is an impressively diverse market; in others, not. On the impressive side of the equation is tenor.

Issuance tends to be skewed towards tenors of three to five years. “We see a lot of liquidity in the five-year tenor,” Soo says; at the time of the interview he was working on a five-year $500 million deal for Cagamas Berhad. But the curve actually goes much further than that. Demand and liquidity for longer-dated bonds is strong, in particular from insurance companies and pension funds in the local market. In 2009 AmInvestment Bank Berhad was sole lead manager on a 30-year government-guaranteed RM5 billion deal  for 1Malaysia Development Berhad. The deal set a new benchmark as the first and largest bond issue ever to be guaranteed by the government of Malaysia. “That is something unique about the Malaysian market,” says Soo. “Liquidity for PDS goes up to 30 years, particularly for infrastructure projects. In other Asian markets you’d be lucky to get a 10-year bond.”

This is perhaps particularly notable on the Islamic side. “We are the only one with a curve from one month to 50 years,” Raja Teh Mainmunah, head of global Islamic markets at Bursa Malaysia, says. “For everyone else it’s just the sweet spot of five years. You cannot manage your borrowings on five years, especially if you are a government: it’s not enough.”

Also, there is a range of structure and rating available in Malaysia. “Banks have been issuing some hybrid tier one and lower tier two subordinated debt in the past two years,” says Soo. Securitization, too, is making a comeback, with a pipeline of residential mortgage backed securitisation transactions in the market. AmInvestment Bank has been actively involved in Tresor Assets Berhad, a RM1.5 billion asset-backed securities programme. “This monetized civil service uncollateralised loans into a pool of ABS rated AAA bonds with maturities of up to 10 years,” says Soo, whose team joint-led the deal. “Since 2008, market demand has been rather weak but we are seeing a revival of interest from investors.”

On the negative side, there are some challenges with the Malaysian market, chiefly that it is very top-heavy. In 2009 98% of public debt securities issuance was rated AA or higher (based on local ratings), including subordinated debt from financial institutions; 55% were government guaranteed or triple A. Only 1% each was rated A or BBB. Nothing much is changing: in 2010 to date, 96% of bonds are rated AA and above.

“Over 90% of PDS in our market are rated AA and above on the local rating spectrum,” says Soo. “Liquidity tends to be very limited for PDS rated A and below.”

To this end, the government launched a credit wrap agency called Danajamin, which applies a triple A wrap around securities from lower rated companies, both on conventional and sukuk issues, in return for a fee. (It is 50% backed by each of the Ministry of Finance and, through Credit Guarantee Corporation Malaysia Berhad, Bank Negara Malaysia. Technically it does not represent sovereign risk, but a special purpose vehicle.)

This was established as a national financial guarantee institution under the RM60 billion Second Stimulus Package announced by Prime Minister Najib Razak on March 10 2009. “Its objective is to provide credit enhancement to investment grade issuers having difficulties accessing the bond market via financial guarantee insurance,” says Soo; under the scheme, total bonds of RM15 billion are expected to be raised in the local bond market. “This creates a new supply of bonds,” says Soo. “We could see more transactions coming through Danajamin credit enhancements, particularly on infrastructure financing.” AmInvestment Bank is working on the issuance of RM250 million AAA-rated Danajamin credit-wrapped Islamic securities for Kencana Petroleum Berhad, the first Danajamin credit-enhanced deal in Malaysia.

Islamic paper is dominant in Malaysia. Sukuk issuance is 59% of total PDS issuance in the market, according to AmInvestment Bank, or RM31.2 billion. Soo estimates it will continue to account for more than half the total PDS issuance in Malaysia.

Globally, the sukuk market has gone through “a U-curve sort of trend,” says Mohd Effendi Abdullah, Director and Head, Islamic Markets at AmInvestment Bank. Global sukuk issuance went from around US$31 billion in 2007 to $14.1 billion for 2008 and $20.2 billion in 2009. “The market is looking for 2010 to be about $20 to $35 billion, that kind of number,” Effendi says.

But through the crisis, Malaysia remained a fairly constant issuer, occupying a greater proportion of global issuance as issuers in Dubai and elsewhere in the Middle East ran into trouble. Malaysia enjoyed about $10.5 billion equivalent of sukuk issues in 2009, Effendi says: 52% of the global total. He expects Malaysia to continue to be half the world total in 2010 too. “We expect Malaysia to be the leader and account for the majority of global issuance.” Most of it will no doubt be in ringgit, but there are also prospects in US dollars.

It’s also enormously impressive for its variety. “We have all types of sukuk in the market: straight sukuk, hybrid, sub debt, exchangeable, whether it’s one month or 50 years,” says Badlisyah Abdul Ghani, CEO of CIMB Islamic. “Issuers from anywhere in the world can come and use the Malaysian platform to do all the available types of sukuk and tenors. The regulatory framework is already there to facilitate it.”

This success has been achieved largely without international participation in the domestic market – and not necessarily for lack of interest from foreign investors.  “This is the peculiarity of the Malaysian ringgit sukuk market,” says Maimunah. “Generally issuers are not the least bit concerned about going out [of Malaysia for funds] because there’s sufficient liquidity in the Malaysian market. There are fixed deposits of half a trillion. Issuers think: if I go out, I have to prepare my offering circular in a different way – I’m not bothered.”

There have been exceptions: $1.5 billion of the $4.5 billion Petronas jumbo deal  in August was a sukuk, and Khazanah also has a track record of targeting overseas investors. (On the conventional side, Axiata’s US$300 million Regulation S deal in April was the first offshore corporate bond from Malaysia since the Petronas deal.)  “If you are a Malaysian looking for RM200 million, there’s no point in looking overseas, but if you are Petronas, it makes more sense,” Maimunah says.

For this reason, some would like to see bigger deals done to tap all available demand. “We might want to see bigger ticket deals done in our capital market to cater to both domestic and foreign investors,” says Badlisyah. “Malaysia is ready to cater to those deals.”

One potential sukuk issuer that would certainly grab attention overseas is the sovereign itself, and some consider Malaysia overdue for a new sovereign bond. It last issued in 2002, with a five year $600 million sukuk issue. Bank Negara clearly wants to see the state come back: Governor Zeti Akhtar Aziz told reporters in March: “Malaysia has not tapped the international capital market for a long time, whether in conventional or sukuk bonds. Therefore, we have encouraged the government to do so because it’s important to have the Malaysian name in the market as well as to create a benchmark for other corporates.” Today, the only outstanding foreign debt is a 7.5% 10-year note maturing in July 2011. Instead, the Petronas deal is the only recent paper that gives some level of sovereign exposure.

The structure of sukuk has been a key point of difference between Malaysia and the Middle East. In Malaysia, the most common structures are musharakah and mudaraba. But these sorts of structures are less common in the Middle East, where the structure is more commonly ijarah and murabaha. This is partly because of a pronouncement by a scholar in 2008 arguing that most non-ijarah structures were not Shariah compliant.  Despite this difference, Effendi does not expect much change. “The musharakah and mudaraba will continue in Malaysia,” he says. “But the detail for the structuring will be enhanced to cater for both sides, Malaysian and Middle East compliance. More innovative structures will come out.”

Mainmunah would like to see more international issuers coming to Malaysia for funds. “Corporate America is looking outside to raise money; we’d like to see more issues from there coming through. We’d also like to see Asian corporates tapping the Islamic markets. This could be a good avenue for Australian corporate too, from a country with commodities, real assets.”

The quest for foreign issuers has occasionally been more fruitful on the conventional side – particularly Korean borrowers – but momentum is shifting towards Islamic markets. “This year we’re looking towards getting more foreign issuers in Islamic markets,” Soo says. “As part of the MIFC initiative we are also working towards getting more foreign issuers including supranationals to issue ringgit and foreign currency bonds in Malaysia.”

Multilaterals were among the pioneers in this market: the Asian Development Bank’s 2004 deal here was the first major cross-currency swap since the Asian Financial Crisis. Otherwise, foreign issuers in ringgit have chiefly been Korean banks, who came in a flurry at a time when they were constrained for liquidity elsewhere.

Wherever it comes from, there is room for growth. “Our ratio of total debt securities to GDP is about 80%,” says Soo. “In a developed market it tends to be 100% or more. With that, there is a growth potential of another 20% in both public and private debt securities in the Malaysian bond market in the coming years. I think we should get there in the next five years.”