In her write-up, she says things are looking up for public debt securities. Read her piece here.
" The corporate debt market, spooked by regulatory risks and a fear of rising defaults, as well as a lack of business clarity through much of this year, is getting its groove back.
Several elements are driving the upbeat tone – a system awash in some RM200bil liquidity, an economy on the mend and an extended period of low and stable interest rates.
As investors gradually turn their attention back to the debt market with renewed risk appetite, companies are rushing in to catch this time “window”.
A week ago, there was a spate of news that several top-rated potential issuers were mulling debtissues.
Genting Bhd said it planned to issue up to RM1.6bil nominal value medium-term notes (MTN) to fund its operational expenses,notably linked to the Sentosa Resort Project and “the balance would be on-lent to Genting and its subsidiaries.”
Then came Pengurusan Aset Air Bhd which said it would sell RM2bil of Islamic bonds this month to fund projects and refinance debt as part of its RM20bil Islamic medium-term note programme.
Subsequently, a news wire agency reported that Port of Tanjung Pelepas (PTP) might issue RM 1bil to RM 2bil of government-guaranteed Islamic bonds to fund its expansion.
With that, many expect the local bond market to spring back to life.
In fact, Maybank Investment Bank’s fixed income research head, expects private debt securities (PDS) issuance this year to be higher at an estimated RM45bil to RM50bil.
Lending further encouragement is the secondary bond market, which has seen trading volume pick up (weekly volume of RM1.5bil), not just for traditionally top notch papers (AAA or Government Guaranteed (GG)-papers), but also for AA- and A-rated debt papers, which implies a gradual return of investor appetite for risks.
“There are clear signs of momentum shifting to PDS, judging from the rising PDS volume against a declining MGS (Malaysian Government Securities) volume,” said a AmResearch credit research director.
He expects the trend to be sustained “as many supportive factors are at play, including valuation, supply-demand, M&A catalysts, etc.”
“This would mark brighter days ahead for the PDS market,” he said in AmResearch’s strategy report.
Needless to say, such a backdrop heightens the allure of tapping funds from the bond market.
A week ago, the Reserve Bank of Australia made a surprise move to raise its overnight cash rate target from 3% to 3.25% after having previously cut rates from 7.25% since September 2008.
The move sparked speculation on who would be next.
Given the need to keep a lid on inflationary pressures amid the strengthening economy, there is expectation that South Korea, China and India may follow suit to raise rates.
That has triggered another question: is Malaysia’s corporate credit market facing a rate-hike risk? Answer: for the moment, not quite.
“There is a decoupling of interest rate expectations,” said the spokesman, who expects the United States to hold interest rates at current low levels as long as the economy remains in its current fragile state.
On the contrary, he pointed out that rates were likely to go up in economies such as Australia, Hong Kong, India and China which have fared rather well.
“(But) Malaysia is an open economy and is still exposed to exports, which growth is not yet on firm ground. Its GDP for the past two quarters have been in negative territory so we are not likely to see a rate hike,” he said.
“Australia escaped recession unlike Malaysia. Also, Malaysia is more of a pro-growth country and as such, is likely to keep interest rates low, especially if there is no significant economic recovery.
“In terms of rate risk, investors do not see one in the short-to medium-term horizon. So the risk remains a benign one. Interest rate hikes still look like next year’s problem,” he added.
Interestingly though, expectations of an imminent rate hike has driven up interest rate swaps.
“Even if our market does not see a hike in overnight policy rate (at 2% currently), regional rate hikes are likely to hog the headlines in the next few months and as such, we will see some pressure on the yield curve,” he reckoned.
There is now a consensus that a potential rate hike may emerge in the later part of 2010.
With that, and understandably so, companies may grab the opportunity to raise debt over the near to medium-term to lock in funding at current low rates.
But according to a spokesman of Maybank Investment, demand for top investment-grade corporate bonds has long been holding steady.
“The thing is, it was not matched by the supply side. Prior to this, companies were afraid of issuing bonds as there was no business certainty. Now with the economic recovery, issuers are coming back into the market,” he said.
But credit risk concerns have not vanished altogether, particularly so as the economy is still fragile.
"In the third quarter of this year," he said,"credit conditions may continue to slide with more downgrades and negative outlooks as opposed to upgrades and positive outlooks, and the number of negative outlooks thus far this year is 3.5 times more than positive outlooks. As such,all this points to a weak credit environment and we can expect the trend to continue until mid 2010 at least.”
The good news – the supply and demand metric is driving up demand for high-quality below AAA-rated debt papers.
“There is potential rising scarcity going forward. Issuance pipeline has clearly shifted towards highly-rated segments (GG and AAA), and drying up on lower-rated segments,” he added.
One case in example is the below-AAA papers of Binariang GSM which has seen some active trading in recent weeks. Binariang is the parent company of Maxis Bhd which is expected to make its debut on the stock exchange by end-November.
Part of the proceeds raised from the initial public offering will be used to partially buy back Binariang’s bonds, hence raising the scarcity value of such papers.
“Also, as Binariang sukuk would be partially bought back at close to AAA levels, capital gains by Binariang bondholders would enhance market sentiment towards PDS,” he said.
So, is the Malaysian market awash with cash still for the PDS sector? Things are not so clear as AS1M Fund has failed miserably to draw in potential players.
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