Malaysia boasts the most developed corporate bond market of any emerging economy, with about 1,700 outstanding issues, so this trade heralds the opening of a market with significant room for growth. "It's difficult to put a number on that potential," says David Rosa, Citi's co-head of emerging markets credit trading, Asia-Pacific. "but the trend is clear: growth is exponential."
Indeed, the global CDS market grew from just $1 trillion at the end of 2001 to a whopping $26 trillion by mid-2006, according to International Swaps and Derivatives Association figures.
The development of a ringgit credit derivatives market is critical, according to Lee Kok Kwan, CIMB's group treasurer. "It will enhance the efficiency of the Malaysian corporate bond and loan markets and significantly strengthen the robustness of the country's financial system from credit risks," he says.
In effect, CDS provides insurance against corporate credit default. This market-opening trade references the credit risk of Projek Lebuhraya Utara Selatan, the parent company of PLUS Expressways, which operates a north-south tollroad in peninsular Malaysia.
Citi chose PLUS as the reference entity to keep the trade simple û according to its end-March annual report PLUS Expressways has M$7.4 billion in outstanding borrowings and is widely regarded as a bellweather of the local bond market.
The two counterparties have not disclosed further details of the trade but, according to sources, the swap has a one-year maturity and a notional value of M$25 million.
The deal is the culmination of a 12-month effort by Citi to build the infrastructure needed to support a local credit derivatives platform and win the favour of Malaysian authorities. "It has been a long process but it was worth the wait," says Rosa. "The introduction of local credit derivatives is an important development for the local market, increasing the hedging tools and adding to the sophistication in the market. It's a big, big plus in the development of the local bond market."