A new mega-issuer from Malaysia

A new government-owned bank has been set up to finance new infrastructure projects in Malaysia. It will also develop the country''s financial infrastructure.

When it comes to infrastructure projects, few Asian nations can match Malaysia for gusto. With a brief pause during the financial crisis, it has consistently poured money into infrastructure.

The government has announced it will fund $8 billion worth of new infrastructure projects and that it will do this via its local domestic debt market – thus helping to build another vital piece of infrastructure for corporate Malaysia. A vehicle called the Bank Pembangunan & Infrastruktur Malaysia Berhad (BPIMB) will launch a series of bonds in ringgit.

BPIMB signed a program today with CIMB and Deutsche Bank which will allow the infrastructure bank to issue bonds with maturities out to 25 years. The program envisages M$5 billion ($1.32 billion) of issuance.

It is expected that BPIMB will fund projects such as the new airport express train, and that these projects will have lives of between 15-25 years. CIMB and Deutsche will be aiming to launch bonds of a similar tenor, and will open up the long end of the yield curve for the first time.

The significance of this is twofold. Firstly, it shows Malaysia has learned a valuable lesson from the financial crisis. When the crisis struck its banks were especially hamstrung because so many of their loans were to infrastructure projects and they faced chronic asset-liability mismatches.

Secondly, these bonds will extend the Malaysian domestic yield curve. BPIMB is owned by the Ministry of Finance Incorporated, which means these bonds qualify as government risk and since there are no government bonds between 20 and 25 years, they will become the new benchmark.

The program – which will work like a Euromarkets-style MTN programme – is the largest and longest dated in Malaysia. Previously the longest dated bond in Malaysia was an Islamic security by Encorp Systembilt, which had a maturity of 18 years.

“This program will enable BPIMB to tap the long dated debt market by issuing high quality long term bonds,” says Nazir Razak, group managing director and chief executive of CIMB. “While investors have ample choices among medium term bonds, high quality long term bond issues are few and far between. This long dated program will also contribute to the further development of the Malaysian fixed income market as a pricing benchmark for issuer and investors alike, thereby extending the tenor of possible future issues.”

Says David Zezza, Deutsche’s co-head of global markets Asia: “This program has been tailored to provide BPIMB with flexibility in tenor and structure that will enable it to achieve funding that efficiently matches the cashflow requirements of the underlying infrastructure projects it finances.”

No bonds have been issued yet, but who will buy such long dated bonds? Certainly, the Employees Provident Fund will be a willing buyer – as it always is – and then there are domestic insurance companies and corporate pension funds. For such entities it will offer a useful means of matching their long dated liabilities with a long dated asset.

The Encorp issue launched by Deutsche Bank illustrates the growing demand among such investors. In the first tranche – launched in February – financial institutions made up the bulk of buying. But in the second tranche – launched in June – 43% of the M$510 million issue was bought by insurance companies and pension funds and 22% by asset managers. Only a third of the issue was taken up by banks.

Both CIMB and Deutsche have good placing capability in Malaysia. Deutsche Bank has 200 people on the ground while CIMB is the dominant local house. It was named FinanceAsia’s Best Local Investment Bank. In a league table produced by Rating Agency Malaysia it ranked first in the period from 1991 to July 2000. During this year alone it has issued a M$1.4 billion bond for SPLASH, a M$400 million issue for Gamuda and a M$785 million issue for the Penang Bridge Project.

BPIMB will look to finance the following infrastructure projects:

  1. Construction of the rail system from Kuala Lumpur Sentral to Kuala Lumpur Airport 
  2. Central Station in Brickfields 
  3. Cyberjaya project 
  4. Port Klang West Port 
  5. Automatic Light Rail Transit Joint Venture 
  6. Shahpadu Highway Project