Q: What state is the Malaysian bond market in at the moment?
A: There has been an increase in corporate bonds in both the public and private sectors. In the public sector we are looking at some debt re-financing and as a result issuance has increased tremendously.
In the private sector, the bond market has in a way experienced a second boom following the crisis. In the early 90s, issuance was growing and the appetite for long-term bonds was picking up, particularly where the banking sector was not able to provide funding for projects longer than five years.
After the crisis, we’re now seeing things pick up again because the banks have not been lending as aggressively as before, and also because a large part of the issuance is used for long-term infrastructure projects. In the bond markets, they can match maturities to their funding requirements. Also, the cost of borrowing from the banking system is still quite high - the lending rate is capped at 5.5% - and you can make basis points savings that make bonds cost competitive.
Q: How competitive?
A: Spreads have come in significantly. During the crisis, they shot up to something like 1200 basis points for corporates with low credit quality, but the risk premium has narrowed to between 200 and 300 basis points. This is helpful in encouraging companies to issue bonds and a healthy development in the broadening of the Malaysian market.
Q: How do you see the market growing for the rest of the year?
A: If economic growth is maintained at between 5% and 6% this year, then we estimate that total credit demand will grow at between 5% and 10% and of that, corporate bonds will be around 50%. That will be a net increase of around M$24 billion [$6.32 billion].
Q: Which sectors will we see most issuance out of?
A: Construction and infrastructure companies will dominate the market just as they have done in the past. As I said before, it’s a good way to match their funding requirements to the length of their projects.
Q: What about the secondary market: is there any investor appetite?
A: I think the secondary market is growing, although it hasn’t increased as much as the more established countries. One of the constraints here is that we don’t have a centralized clearing system. This, and developing this sector, has to be one of the key focuses for the capital markets in the next decade because the primary market is developing well and is already close to 40% of GDP.
Q: What sort of bonds are we seeing being issued?
A: Aside from MGS [Malaysian Government Securities], we see a lot of straight corporates - we rated 29 deals last year - and the Islamic market is growing.
Q: Who invests in Islamic paper?
A: We have a very large Islamic banking sector looking to mobilize funds. They’re short of investment opportunities and this is an avenue they choose to go down.
Q: What about the potential for the securitization market?
A: On the asset-backed securities side, we have not really seen any true issuance where there has been a true sale of assets, but it is quite likely that we will see a couple of deals this year.
Q: Is the legislation in place for that true sale of assets into an SPV?
A: That is being addressed at the moment, but we are confident that this will happen and the securitization market can develop. We’ve been pushing for this since 1995 and now it looks like the government is really focusing on removing the legal and regulatory constraints.
Q: Returning to the bond markets in general, the government has obviously tried to address its importance with the Securities Commission’s capital markets masterplan. But what would you say are the key issues that need to be addressed to give the market a real boost?
A: I think previously the market was hindered by the lack of a benchmark, but recently the issuance of MGS has increased where we have a yield curve and a kind of benchmark. That will be very helpful for determining the pricing of corporate bonds. What we need to see now is an increase in trading volumes and liquidity. To help achieve this, we need to broaden the investor base.
Q: How?
A: Right now, it is focused on the traditional investors such as pension funds and insurance companies which buy bonds and hold them to maturity. That prevents the secondary market developing. We need more non-passive investors, we need to encourage more mutual funds and unit trusts to become active in the bond markets.
Q: Are we seeing these companies become more active in Malaysia?
A: We’ve seen a pick up since the crisis, because they want to diversify away from having purely equity-linked portfolios. That has always been a problem with Asian investors in the past.
Q: What about transparency in the market?
A: Malaysian accounting standards do provide a level of disclosure and rank as one of the best among the developing nations. But right now, the accessibility of information is not widely released. The information is there but you need to be a trustee, fund manager or one of the lead managers.
Q: Finally, what about the restrictions on foreign corporates issuing in Malaysia because of the capital controls imposed upon them?
A: Basically, they have to use to the proceeds in Malaysia - they cannot invest them elsewhere. That said, foreign issuance did increase last year because it’s cheaper than bank financing. Nestle and BAT both did deals and multinationals such as those issuing in Malaysia adds quality and credibility to the market.
Of course the next stage will be to allow both domestic and foreign corporates to be able to invest proceeds from bonds into foreign projects. A day will come when we will see that happen and from that we’ll see an increase in cross-border flows.
