Malaysia debt markets report: Foreign issuers

In Chay’s view, there is still a role for foreign issues, since they tend to come with some yield pick-up. “There’s still a lot of demand for yield,” he says. “Generally government bond yields have been coming down [although lately the yield curve has moved around a bit as investor’s have shown concern about financing the national budget deficit] and fund managers need to balance the portfolio with some higher yielding paper.” It might seem odd for major Korean banks, in some cases with a higher rating than their Malaysian peers, to be considered high yielding, but that reflects pragmatism on the part of the issuers and their bookrunners. “The way we have been pricing the foreign issuers, even though they may have a higher credit rating, is we still give a yield pickup,” says Chay. “Even for Kexim, a highly rated name, we still price it off the MGS [Malaysia government securities].” With a name like Kexim, “they [investors] get an instrument that is fairly high grade – which it is, the credit rating is higher than Malaysian government bonds – yet they also get some pickup on it.”

Chay says a host of Malaysian investors fit into this position and remain potential buyers of foreign paper in ringgit. “They are banks, insurance companies, government funds,” he says. That said, not everyone agrees that investors are so universally open-minded. Lim Ghee Keong is group treasurer of Usaha Tegas, the parent company of Binariang, which launched the largest ever sukuk in 2007, worth RM15.35 billion; correspondingly he knows a bit about market appetite and liquidity. “Certain investors have avoided investing in those foreign issuers,” he observes. “Especially, some of the insurance companies have avoided them.”

And foreign managers too notice a certain reticence in local investors to look at foreign credit today. One foreign banker says foreign deals carry “the perception of credit risk. You’ve seen a tendency in Malaysia and other markets for investors to focus more on onshore than offshore names, and that wasn’t the case a year ago.”

Wipplinger adds that the buyers of Korean credits varied last year. While the big pension funds were more important for issuers with a state background, the majority of investors for corporate like Hyundai Capital came from insurance companies, asset managers and banks.

While it is true that the funding price advantage has slipped a little, and that there is a clear ceiling on the volumes that can be raised locally, that doesn’t mean Malaysia lacks merit for foreign investors. “If they come here to raise money they still make a bit of a saving,” says Chay. “It’s not going to solve all their problems because you can’t raise $2 billion from Malaysia, but they like to keep the avenue open as an alternative way of raising money.”

There is understood to be a healthy pipeline of deals from foreign issuers waiting for brighter markets to issue in. Several will go to the sukuk market (see separate article), including GS Caltex of Korea and a major Australian bank, taking advantage of the fact that Islamic bonds necessarily have a wider investor based (Islamic plus conventional) than conventional bonds (conventional investors only). “It’s simple logic,” says Chay. “If it’s conventional paper only conventional investors can buy. If it’s Islamic paper, Islamic and conventional investors can buy. There’s clearly a bigger pool of investors if you do Islamic paper.”

BOX: Korea Development Bank profile

One Korean issuer that was conspicuous by its absence last year was the Korean Development Bank, considered one of the savviest of Asian debt market borrowers.

Seung Hyun Cho, head of the global funding team, says that doesn’t reflect a lack of interest. “We do have an interest in opportunistic funding opportunities, including the Asian local currency markets and obviously including the Malaysian ringgit debt markets,” he says.

“The information I have is that the market is there but it all depends on the market situation,” he says. “I understand a few of the banks already have some record in issuing bonds in Malaysian ringgit,” and KDB monitors the situation.

“There are two reasons KDB or other Korean banks would tap any Asian local currency market,” he says. “The primary reason is to develop new markets. KDB believes that there will be more chances to have business opportunities in the south east Asian region in the future. So developing new niche markets for our funding purposes is interesting.”