Malaysia's equity markets are still regional seconds

Malaysia may not have a deep inventory of big-name companies that will come to market in 2010, but it does have liquidity.

For most of 2009 there was little capital markets activity of note on the Bursa Malaysia. AirAsia raised $166 million in a follow-on in September, Maybank had a successful $1.7 billion rights issuance in April and three Chinese footwear companies launched small initial public offerings (IPOs) during the year.

This trickle of equity capital markets activity followed a series of delistings earlier in the decade that left a bad taste in the mouths of many international investors for Malaysian equities. Maxis Communications and PBS Palm Oils both delisted in 2007.

Given the dearth of activity, it's safe to say Malaysia isn't the first country that pops into the head of an investor in New York or London when thinking about emerging market opportunities.

But that is not to say Malaysia has completely dropped off the international radar. There was the jumbo bond from the state-run oil and gas company Petronas and a record-setting IPO from domestic mobile services provider Maxis, which took the market by storm. Malaysia also became a darling for foreign bond-issuing corporates, which discovered a hungry Malaysian investor base.

But first, let's look at Malaysia's potential to draw international investors. While there are issues surrounding how the Petronas August deal was executed, its $4.5 billion dual-tranche bond was heavily oversubscribed with more than 87% of orders coming from outside Malaysia. Of note is that the bond was split into $3 billion of conventional 10-year notes and $1.5 billion of five-year sukuk, or Islamic bond, certificates. The Islamic portion tied with DP World as the world's largest ever sukuk.

The $3.3 billion Maxis IPO was Malaysia's largest ever. Launched in November, the deal was covered more than three times by investors at a price of M$5 ($1.48) per share with a promise from the company to distribute at least 75% of its net profit. Overall, the split was fairly equal between international and domestic investors, with 60% of the institutional tranche being placed outside Malaysia.

The Petronas and Maxis deals, based on their size alone, are likely to remain at the top of their respective league tables in Malaysia for some time. But despite the international interest these issues garnered, they do not represent a significant shift in the attractiveness of the country's capital markets to foreign investors.

No go on equities

"Unfortunately there are no more obvious private sector companies quite like Maxis to come to market in Malaysia," said Stephen Hagger, head of equities and country manager for Credit Suisse in Malaysia. "Maxis was unique."

That is not good news for a country that has been hyping its capital markets to international investors and issuers for some time.

Earlier last year, Malaysian prime minister Najib Razak said internationalisation was the "inevitable" next step for the development of the country's capital markets. He argued that liberalisation is the only way for Malaysia to achieve this goal -- this from a man who just months before passed one of the country's more lacklustre liberalisation packages.

One change Razak implemented last year to encourage foreign activity on the country's exchanges was a loosening in bumiputra, or ethnic Malay, requirements for IPOs. Previously, a company that was launching an IPO would have to fill a 30% bumiputra ownership requirement, often at a discount, before putting the rest out to the market. Now, ethnic Malays get first right of refusal of 50% of the free float, or 12.5% of the entire listing, but with no special terms.

"This bumiputra rule is a big reason why many companies went overseas to list their assets and why there have been few very significant IPOs in Malaysia during the past few years," said Hagger.

But even with the liberalisations Malaysia faces stiff competition from neighbouring equity markets and investor preferences.

"Even if you give people tax rebates, multinational companies and hedge funds will always find a reason why they'd rather live in Hong Kong and Singapore," said a source. "That's just life."

Asked whether the recent Petronas and Maxis issuance should be seen as signs that Malaysia is becoming an international financial centre one banker said: "Malaysia's becoming a global centre for Chinese footwear but in terms of an international centre, not anytime soon."

This is a sad truth for the country. Since at least 1990, when Malaysia launched Labuan as an offshore international financial centre, the government has been pushing various initiatives to attract international capital flows. More recently, Bursa Malaysia inaugurated US dollar clearing and settlement in order to improve competitiveness with other Asian exchanges.

There are also some positive moves forecast to come in Malaysia's equity markets. This year, Khazanah Nasional, the government's investment corporation, is expected to sell off some of its holdings, which include stakes in CIMB Group, Malaysia Airlines, national auto manufacturer Proton and Telekom Malaysia.

Bankers agree that the move by Khazanah is generally good for the local market but say it is unlikely to attract new international investors to Malaysia's markets. "The public float will increase [and] that will indirectly create more liquidity," said Wai Leong Chay, managing director of RHB Investment Bank. "But not all the shares have gone into the market, some have gone to long-term investors which doesn't help liquidity. They've gone from one place where they're locked up to another."

Local companies are just as unlikely to be issuing bonds, as they are unlikely to launch big IPOs. "You won't be seeing Malaysia as a huge source of supply of G3 bonds," said Ho Heng Chuan, global banking head for Malaysia at Citi. "There aren't many companies who are investment grade and have a US dollar requirement at the same time." He said that there was a "scarcity" of US dollar bond issuance globally in 2009 and noted the Petronas deal was the only big issuance out of Malaysia last year.

Local investors

But foreign companies have discovered that the local market has liquidity and domestic investors are eager to buy debt from investment-grade companies.

"Malaysia has liquidity," said Chay. "If you look back to the height of subprime, when the [US] dollar market was closed, [Export-Import Bank of Korea (Kexim)] discovered Malaysia. It raised $300 million, which was a lot of money in those days."

Since the Kexim issue, Industrial Bank of Korea, Woori Bank and Hana Bank have all issued ringgit-denominated bonds in Malaysia. According to a source, Korea Hydro and Nuclear Power and the Korean National Oil Company (KNOC) plan to issue ringgit bonds in Malaysia this year.

In addition to the liquidity available for conventional bonds, Malaysia is the world's leading sukuk issuer. In the first seven months of 2009, 81% of global sukuk issuance worth $7.6 billion came out of the country. This past November, the Malaysia International Islamic Finance Centre (MIFC) held a conference in Seoul introducing Islamic finance to Korean issuers. According to Raja Teh Maimunah, global head of Islamic markets at the Bursa Malaysia, the meeting was designed to attract Korean issuers to Malaysia as well as help the Korean government with the necessary amendments to its tax code and capital markets act in order to develop a local sukuk market.

"What we offer is a platform for Korean issuers to issue non-ringgit sukuk in Malaysia," said Maimunah. "But we want those issuers to be able to issue in Malaysia and Korea."

But we may have to wait and see how the Islamic market holds up. The fall-out from Dubai World's request to postpone payments on $26 billion of its debt, including $6.95 billion in sukuk issuance, according to Kuwait Finance House Research, has yet to be fully understood. There is no precedent in the Middle East for restructuring an Islamic bond so this could get sticky. For now, Malaysians are trying to put a positive spin on the story. "What's happened in Dubai is a credit issue, not an Islamic issue," said Maimunah. That may be true, but Malaysia may still be affected.

But despite the potential downsides -- the lack of more issues like Maxis and Petronas and the possibility that investors may go off Islamic issuance because of what's happening in Dubai -- bankers are optimistic. As one banker (who presumably has a pipeline) put it: "I've made more in the last quarter [of 2009] than in the first nine months. 2010 will be quite a busy year."

The story was first published in the December/January issue of FinanceAsia magazine.

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