KUALA LUMPUR: There is a need to widen the credit spectrum to create a more diversified capital market, particularly in bond issuance as most are skewed towards higher credit rating issuances such as AA and AAA-rated.
Danajamin Nasional Bhd CEO Mohamed Nazri Omar said most of the bonds in the market are higher rated such as AAA and AA, mostly comprise of government or large corporates.
“Our market doesn’t have A-rated (bonds) that much. The credit spectrum is so skewed towards AA and AAA now. There’s no diversity in that,” he told reporters at the RAM-SIDC Bond Conference “Fresh Perspectives: Engineering the Future of the Malaysian Bond & Sukuk Market” today.
A-rated bond is still considered investment grade, or bonds that carry low to medium credit risk.
Nazri explained that a developed market should have the ability for issuers with a diverse credit spectrum to issue their bonds/sukuk on a standalone basis. Right now most A-rated corporates are unable to issue without some form of credit enhancement.
He added that the concern of investors is the liquidity or tradeability of A-rated bonds, and not so much on the credit aspect. This means that when there is a need for investors to sell their bonds, can they sell it without incurring huge market loss?
“In terms of issuance, the market is going to develop. There will be more and more issuances because the market is deep enough to help corporate issuances. Liquidity is the issue. We have to talk to regulators, investors, bankers on how to create more market making opportunities.
“Having the market making post issuances will create liquidity, that is if I want to sell, I can sell. The price discovery is also better,” said Nazri.
Describing it as a chicken and egg situation, he said to boost liquidity is to encourage players to buy and sell, but players are also caught in situations concerning their risk appetites.
From the macro perspective, the bond and sukuk market’s ability to provide cost-efficient long-term financing to both the public and private sector makes it integral to the economic development and market resilience.
Securities Commission Malaysia chairman Datuk Syed Zaid Albar said while the bond and sukuk market is deep, the credit profile is relatively narrow, with RM384 billion in papers rated as investment grade as at June 2019.
“This has important policy implications, as the inability of lower-rated issuers to access the bond market may result in an inequitable two speed financial system, where lower rated issuers face constraints in accessing both market based and non-market based financing,“ he said in a special address during the conference.
He added that this may impact the ability of Malaysia’s emerging corporates to scale up and grow into future blue-chip companies.
”This is no doubt a complex and multi-faceted issue, which requires market-based solution so as to avoid potentially adverse long term implications for the capital market at large. For such issuers to come to the market, they must be confident that sufficient demand exists from investors with the necessary risk capabilities and appetite for non-investment grade papers,” said Syed Albar.
Malaysia has one of the deepest bond markets in Asia, with bonds and sukuk outstanding amounting to RM1.49 trillion as at end-June 2019. From a comparison perspective as a percentage of GDP, the Malaysian bond market remains third largest in Asia ex-Japan as at end-2018. As at end-2018, Malaysia accounted for 50.4% of the world’s total sukuk outstanding.
Despite periodic bouts of volatility in the broader market, financing activities in the corporate bond and sukuk market remain relatively resilient, with RM78.4 billion raised in the first six months of 2019. The half-year performance is close to 2018’s full-year tally of RM105.4 billion.