Game of two halves, says RAM

Suresh Menon and Suet Ming Siew of Ratings Agency Malaysia explain why they expect bond market activity to increase in the next six months.

The domestic bond market in Malaysia grew substantially between 1999 and 2001 but has slowed down in the first half of the year. RAM's executive director Suresh Menon and senior structured finance analyst Suet Ming Siew explain reasons for the dip in growth and why they expect the second half to be much better.

How have the Malaysian bond markets been so far this year?

Suresh Menon - Just to put it in context, I think during the crisis it became widely recognized that the banking system could not serve the financing needs of the country, and because of that the bond markets grew substantially in 1999, 2000 and 2001. The equity market basically stood still during that time, a lot of IPO issues were not accepted by the market, so many companies opted to do bond issues.

This year, it's been slightly slower in terms of new issues that we've rated. In 2000, it was about M$22.5 billion ($5.9 billion), in 2001 it was M$30.6 billion and as of May 31, 2002 it's M$9 billion. If you annualize that figure, it is probably going to be slower than 2001, but from June to December, there are many large issues in the pipeline so we could see the final figure ending up at the same levels as 2001, or probably slightly less.

Are the markets now reaching a level of stability in growth, or is there another reason why it has been slightly slower this year?

One of the reasons is the equity market has turned around this year and there has been some improvement in the stock exchange and many companies have opted to raise funds through the equity market.

Suet Ming Siew: Another reason was that after the crisis a lot of investors were a lot more cautious so what you see now are only high quality rated companies being able to access the capital markets. So even if there are companies which want to issue, they may not be able to get the ratings they need or investors who will take up their paper. If you look at the new issues coming out this year, the ratings are definitely of higher credit quality.

So what ratings are acceptable to investors?

SSM - What is acceptable now is single-A or above. Investors are still driven by credit quality rather than yield.

What have been some of the standout deals done this year?

SM: The big deal was for PLUS, to build the highway between the North and South, and they have also just done an IPO. They did the biggest deal this year, in fact M$5.1 billion of the M$9 billion total came from the PLUS bond in May. That was part of their restructuring.

One of the reasons for the increase in volumes in 2001 was the restructuring of debt that some firms were burdened. Banks took in tradable debt papers.

What have been some of the key developments in the market in the past year?

SM: The biggest development has been the introduction of securitization financing, and quite a few deals have come to market. In April 2001, the securitization guidelines were issued by the Securities Commission (SC) and since then two collateralized bond obligations (CBO) and one collateralized loan obligation (CLO) have been issued for a total of around M$1 billion.

There have been a few deals but it does seem as though a few that were in the pipeline have not happened. Why do you think that is?

SSM: There may be a couple of reasons. One is that investors are not familiar with ABS structures and number two is the time taken to structure these deals. Issuers are not really willing to invest such time.

However, some deals are at the approval stage with the SC, so we could see the floodgates opening. We're still getting plenty of inquiries and expect another four or five deals. There is a commercial mortgage backed securitization in the works, trade receivables deals and consumer credit assets that could be securitized this year.

Are ratings generally on an upward curve? Are companies becoming more credit worthy?

SM: We saw the biggest number of defaults in 1997 and 1998 but what we see now is stability in the ratings. There have not been too many upgrades, but some sectors are looking a lot more positive now, the banking sector for example. Now that the first phase of consolidation has been completed, a lot of banks can focus on loan growth and growing their asset base.

What does the fall in defaults say about Malaysian corporates?

SM: I think it shows that corporates have got their act together in terms of debt restructuring. Many companies may have over-borrowed in the past, because banks were a bit gung-ho in the mid-1990's as they were flush with liquidity. Since then, we've seen corporates become more prudent in terms of managing their balance sheets and a little bit more aware of matching their funding profile. It used to be a classic case of borrow short and finance long and they got hit during the crisis.

How do you expect things to develop for the rest of the year?

For 2002 and beyond we're really looking for the securitization market to take off. That is really going to provide the backbone for the market, much as it does in more developed countries.

SSM - A lot of companies are looking at structured deals. They're a little bit more innovative than they were before when there was a heavy reliance on straight borrowing and bank guarantees. Now, they can see that in many cases the use of ABS structures can result in better ratings.

SM - Project financing is also going to be important. This sector has seen tremendous growth in the past couple of years, and I think that will carry on. If the government continues its pump priming, where it spends to break the economic slowdown, there will definitely be more project financing needs, particularly in the construction sector.

We've seen the capital markets masterplan and securitization guidelines issued in the past year. Is there anything else that could be done from a regulatory point of view to boost the market?

The market is doing pretty well and a lot of hurdles that may have existed in the early 90's have been overcome. We could perhaps do with some changes on the investor side. We really do not see much trading in the secondary market and that's an angle that we need to look at. An individual that invests in a corporate bond is exempt from tax on the interest income, but that has not been extended to corporates that invest in bonds, and perhaps if this was lifted we might see an increase in secondary market activity.

Malaysia also has a bit of a buy and hold culture and a lot of institutional investors do not have trading desks. We see a lot more trading from the financial institutions, but not from the big investors such as the Employees Provident Fund.

RAM is a member of the Asian Credit Ratings Association, set up last year. How involved are you with this?

It was formed in September last year, and this year we had our first workshop on securitization, which was held in Manila. This is one area that the Asian agencies would like to develop, so we got the same trainer that trains our staff and brought her along to the meeting. There were 30 representatives of the 15 ratings agencies present.

The purpose of forming the agency is not to go against the international agencies, but to develop our own skills and to follow best practice within Asia. The aim is to have two training seminars a year and also meet up at least once a year to exchange ideas. Best practice is very important because we would like to standardize the way we do the ratings.

We are also hoping to come out with an Asian bonds newsletter, which will collate all the information from different countries, although this has not been finalized yet.

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