Saturday January 2, 2010
Bonds and sukuk: Going strong
By DALJIT DHESI
THE bond and sukuk market, which has been gaining ground since the second half of 2009, is expected to chart stronger growth in 2010, buoyed by the global economic recovery, low interest rates and the Government’s pump-priming initiatives.
With the economy showing signs of a rebound, more corporates are expected to tap the debt market to fund their operations and deals.
On the other hand, demand for government bonds, according to industry players, is anticipated to decline due to, among other things, the Government’s priority of reducing the budget deficit. The Government is maintaining its budget deficit forecast of 5.6% of gross domestic product in 2010, a reduction from the estimated 7.4% last year in spite of the higher growth trajectory.
Malaysian Rating Corp Bhd (MARC) chief executive officer Mohd Razlan Mohamed says he expects to see a pick-up in the primary market activity next year for conventional bonds and sukuk, and that the healthy issuance pace since the second half of 2009 to likely continue.
New corporate bond issuance in 2010 is expected to be in the range of RM45bil–RM50bil, of which about 60% will be in the form of sukuk, he notes.
He attributes the growth to the improvement in economic activities, the retreat in financing costs, and the capacity of Danajamin Nasional Bhd to guarantee up to RM15bil worth of bonds.
According to Razlan, MARC does not foresee another episode of a massive flight-to-quality into the safe haven of government papers this time around, which he felt is positive for corporate bond and sukuk demand.
He says bond yields for AAA and AA credits have approached their fair value but feels it can still offer some more upside value for investors.
With economic recovery gaining traction and risk aversion declining, he says spreads on corporate bonds can compress further in 2010, albeit at a much slower pace.
Concurring with Razlan on the positive growth of corporate debt and sukuk, RAM Ratings CEO Liza Mohd Noor says she foresees RM50bil of new issuances of bonds and sukuk in 2010 – about 25% higher than last year.
“Government-related infrastructure projects and banks’ capital-raising exercises are envisaged to account for the bulk of the debt capital market activity.
“Conducive fund-raising conditions and a brighter economic outlook will also encourage corporates to seek additional funding to fuel their growth,” elaborates Liza.
Of late, she adds, RAM’s analysts have received optimistic comments from issuers in various industries in relation to their plans. This is in contrast to the bleak tone at the start of 2009.
“This growing chorus of upbeat sentiment is positive for corporate debt and sukuk market,” she says.
CIMB Group deputy CEO, group treasury and investments, Datuk Lee K. Kwan says for 2010, it expects banks to continue to tap the ringgit bonds/sukuk market for capital management and to fund expansion.
He adds that banks’ hybrid capital provides a much cheaper and efficient form of capital compared with equity.
The ringgit debt market for bank hybrid capital, he notes, has been very active over the past two years, with RM6.6bil issued in 2009 and RM10.5bil in 2008.
For the ringgit bond market, the biggest development is that individuals are for the first time directly investing in the bond market as opposed to relying on unit trust fund managers, Lee says.
Illustrating the performance of the debt market using a regression formula, Bond Pricing Agency Malaysia Sdn Bhd CEO Meor Amri Meor Ayob says the sukuk market this year is expected to grow by a further RM29.3bil to about RM270.7bil, while the whole bond and sukuk market is expected to grow by RM54.4bil to close to RM691.3bil.
Maybank Investment Bank Bhd managing director and head of debt markets, John Chong, says government-guaranteed and AAA issuances are expected to decline in 2010 but will still be substantial – about 40%–60% of total issuances.
AA issuances, on the other hand, are expected to increase as corporates borrow to fund business expansion, Chong adds.
The investment bank anticipates single-A issuances this year to decrease from 2009, as banks are mostly done with capital-raising activities.
On government bonds, Chong notes, by virtue of a projected reduction in Malaysian government securities (MGS) issuances in 2010, it is expected that the Government will issue more short-term MGS, thus helping to spur borrowings by businesses and raising the amount of private debt securities (PDS).
HSBC Bank Malaysia Bhd treasurer Piyush Kaul says the lower government bond issuances, due to a reduced fiscal deficit, will result in less competition for funds from the Government, hence increasing the interest in good quality PDS.
On a positive note, Alliance Investment Management Bhd executive director and head Nik Azhar Abdullah says it is currently advising on a potential PDS/sukuk programme for Alliance Bank Malaysia Bhd and Alliance Islamic Bank.
“We took a very cautious view last year and decided not to proceed with any issue due to market sentiments resulting from the subprime crisis,’’ Nik Azhar explains. The last issuance by Alliance Bank was in May 2006 for RM600mil in subordinated bonds.
Danajamin CEO Ahmad Zulqarnain Onn says fixed income investors are still risk-averse over lower rated (A and below) credits, while at the same time, the cost to issue A and BBB bonds has increased.
This, he adds, is not a healthy trend and needs to be reversed. In this regard, he says the financial guarantee insurer will provide guarantees for lower-rated bonds to ensure viable companies will have access to the bond market on terms that are economic.
By wrapping lower-rated investment grade bonds and demonstrating over time that these bonds are worthy of investment, risk aversion towards this segment will be reversed, Ahmad says.
To date, Danajamin has received 10 applications from both listed and private companies, with a total guarantee amount requested of RM2.16bil.
Liza says the perennial issue of credit rationing still exists and needs to be addressed. “Over the last 20 years, RAM Ratings has observed investors favouring an increasingly narrow band of highly-rated bonds/sukuk.
“This has prevented investment grade companies (BBB and A credits) from tapping the bond and sukuk market for funds. If this persists, Malaysia could lose its position as one of the leading and most dynamic bond/sukuk market in this region.”
RHB Investment Bank head of debt capital market Peter Choong says another challenge is to develop the non-ringgit bond/sukuk market in a bid to become an international sukuk centre.
To fortify the debt market, Choong says, Malaysia also needs to develop a retail market for bonds/sukuk in view of the high savings rate and the amount of funds trapped in fixed deposits, to strengthen the debt market.
Clearly, despite the debt market’s promising prospects, much needs to be done to ensure its vibrancy as an effective source of funding.