The strategy also closely mirrors Malaysia’s last outing to the dollar-denominated sector in September 2000, when Chase surprised the whole market by suddenly re-opening the sovereign's outstanding 2009 bond and raising a further $500 million. This time round, the government will open books at $750 million and subject to demand, may increase the deal to 2001's full $1 billion overseas borrowing quota.
Rumours of new supply had a widening effect on the Baa2/BBB-rated credit's paper all of last week, with the $1.5 billion 8.75% June 2009 bond moving out about 5bp per day. It closed yesterday at a bid/offer spread of 213bp/203bp over Treasuries.
At this level, it is trading about 74bp wide of the Republic of Korea, whose benchmark 8.875% April 2008 deal is currently bid at 139bp over. Back in September, the positions were completely reversed, with the Malaysian 2009 trading where it is today around the 209bp level and 10bp to 15bp through Korea's levels.
Malaysia has traditionally been fiercely competitive about its spread levels relative to similarly rated Korea and the decision to launch a new deal in the current circumstances has raised a number of eyebrows. Indeed, for many observers, it seems particularly strange embarking on a new benchmarking exercise when Dr Mahathir is functioning as both prime minister and finance minister.
"Investors are generally very unsettled by Malaysian politics," says one country expert. "At the beginning of last week, there were concerns about the lack of a successor to replace Mahathir ahead of the next presidential elections. This week there are concerns that he may never willingly stand down.
"There seems to be a general sense that the UMNO meeting was a bit of a debacle," he continues. "There’s still no new finance minister and the party failed to appoint a new Treasurer to replace Daim and take control of UMNO's immense asset base. Instead, we saw the prime minister stand up and perform his usual party trick berating foreigners. Now he is turning to them cap in hand. Not good timing."
A second adds, "It's just as well the country isn't doing formal presentations. It would be almost impossible for one man to run a country, represent the Finance ministry on roadshows and make investors their tea all at the same time."
For the country's supporters, however, the 'Mathahir effect' makes the deal extremely cheap for investors and hence a strong buy. It is also the case that while Malaysian sovereign spreads have performed badly relative to Korea, this is in large measure because Korea has outperformed much of the rest of Asia.
Back in January, for example, the Korea 2008 opened the year at roughly 235bp over Treasuries and has since contracted about 100bp. The Philippines has also performed well, with the sovereign’s 2010 bond coming in about 200bp on its 2008.
Other Asian sovereign benchmarks, by contrast, have moved about 30bp or in the case of DBS stayed flat on oversupply concerns. The China 2008, for instance, opened the year at 156bp and closed yesterday at 130bp.
"I think you can make the argument that Malaysia is a hidden gem," comments one banker. "That its fundamental strengths in terms of GDP per capita, natural resources, infrastructure and growth are all hidden by the politics. On this basis, the country's bond spreads offer significant unrealised value."
However, were observers to concur that the bonds are cheap, most would then ask why the country has decided to approach the international markets now. The answer appears to be twofold.
"From an absolute point of view, interest rates are very attractive," one observer notes. Yes Malaysia might have been able to pick a tighter moment to launch a deal, but the fact is we've had six very good months for the fixed income markets and who knows how much longer this will last."
The second reason stems from concerns about a global slowdown. "The wisdom of timing hinges on your view towards the US economy," he adds. "If you take a pessimistic view, then better to go now since Malaysian economic performance lags that of the US."
Malaysian GDP growth halved between the fourth quarter of 2000 and first quarter of 2001, coming down from 6.3% to 3.2%. Late last week, the Prime Minister stated that second quarter growth will remain weak.
On a more positive note, however, Bank Negara has said that foreign exchange reserves rose 0.4% to $26 billion during the first half of June. The news is likely to ease fears that falling reserves may force a currency devaluation. Over the first five months of the year, they had fallen 13%.
