Business

Monday July 13, 2009

Bond defaults not expected to accelerate

By ELAINE ANG


PETALING JAYA: Bond defaults are not anticipated to accelerate in the last few months of the year despite an uptick in defaults in the first half, rating companies said.

Malaysian Rating Corp Bhd (MARC) had two issuers of long-term corporate debt papers from its rating universe defaulting so far this year, translating into a realised default rate of 2% in the first half of 2009.

MARC vice-president of fixed income research Wan Murezani Wan Mohamad said: “Our default rate forecast for this year is 4.8% which is still comparable to 2007. However, there is certainly an uptick in our forecast for this year from last year’s 2%.”

Wan Murezani ... Our default rate forecast for this year is 4.8%

However, he does not anticipate an acceleration in the trend of deteriorating creditworthiness in the last few months of the year.

“Further significant multi-notch downgrades from issuers in MARC’s investment-grade rating categories in the next six months, although possible, is considered remote at this juncture.

“Nonetheless, the likelihood of single-notch downgrades among issuers already placed on MARCWatch Negative and issues with negative outlooks attached remains high,” he cautioned.

RAM Ratings Services Bhd also saw two issuers defaulting with a combined rated facility amount of RM170mil up to the second quarter of the year.

This compares with two issuers in default for the whole of 2008, on a total rated amount of RM300mil.

Chief executive officer Liza Mohd Noor said RAM Ratings’ base line default forecast for 2009 (based on the assumption that the ratings in 2009 migrate in a similar pattern as the historical rating movements observed), was 1.8% (up from 1.05% in 2008), with a worst-case scenario of 4.8%.

“Despite the increase, we expect the default rate to be well below the 8.8% registered at the height of the Asian financial crisis,” she said.

RAM Ratings anticipates that most of its rated bond portfolio will remain resilient against the more challenging environment given their relatively high ratings, with the median rating remaining at A1/AA3.

“From our historical insight on the probability of defaults, high investment-grade issues should be able to weather the storm pretty well,” Liza stressed.

Some of the major reasons cited for increasing bond defaults are reduced borrowing availability due to a decline in confidence on the part of lenders and investors. As a result, issuers with limited financial flexibility are unable to extend their term financing and roll over their short-term debt maturities.

The present difficult operating environment has also led to falling revenue, lower profit margin and reduced working capital efficiency, all of which would result in greater vulnerability to default by issuers with weaker credit profiles, that is, issuers in the lower rating bands.

MARC chief rating officer Milly Leong said companies that have issued bonds with lumpy debt maturities falling within the last 12 months and next 12 months were most at risk of defaulting due to adverse debt and equity capital market conditions.

“Companies that operate in sectors which are currently suffering from demand weakness such as automotive, construction, property and building materials are susceptible to deterioration in their credit profiles.

“The more vulnerable issuers are also characterised by high debt leverage, modest financial flexibility and thin liquidity cushions,” she added.

For RAM Ratings, bond issues which are more rating-sensitive are those originating from the export-oriented industries (with the exception of consumption sectors such as glove manufacturing and fast moving consumer goods manufacturers that produce daily staples), retail and hospitality sub-sectors.

The other sectors that it is particularly wary of are the property and construction-related industries as take-up rates for new developments slow down, and are subject to speed of execution and disbursement of funds.

On the outlook for the bond market, Liza expects capital formation to remain driven primarily by the public sector and its related entities.

Nevertheless, she believes the private bond market may start showing improvements towards year-end or early 2010 compared with a dismal first-half performance.

Liza said the local bond market would be well supported by the upcoming 10th Malaysia Plan, with its emphasis on attracting investments via more projects and sector liberalisation as well as foreign issuers, among others.

The latest foreign name to tap the local market is South Korea’s Hana Bank, a unit of Hana Financial Group, which last month raised RM1bil from the domestic bond market.


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