IFR: So expand on that last point about the fund. How do you envisage that might work?
Promod Dass, RAM Ratings: Well, you could have a fund that focuses on this segment and of course they will look at high-yield. As to the type of investor, I’m not sure. But I just feel that there is a gap in the market. I go back to the point that when banks sell NPLs, there are investors or funds that come and look for these sorts of risky assets.
Ai Chin Tan, OCBC: On the issue of Danajamin, one fundamental issue that needs to be addressed is making sure that credit wraps don’t result in issuers generating a pricing arbitrage between the bond and the loan markets; I think that’s critical because we do not wish anyone destroy the market, whether it is the loan or bond market.
I think it’s important that Danajamin sticks to its strategic initiative to look at financing or providing support to projects that require long-term funding but which are not supported by the banks. And secondly is to ensure that these projects have a multiplier effect to the economy as a whole. I think it is very critical for us to support the private migration of lower-rated paper eventually. Because if people start focusing on arbitrage, what’s left to develop in the bond market?
Maimoonah Hussain, Affin Investment Bank: The other thing to bear in mind is I don’t think Danajamin is actually able to support the SME sector overall. If you think about it, SMEs, in particular those looking at exports, lend themselves more to the bank market because of the magnitude of financing they generally require. Unless they’re undertaking major capital investments, they don’t need the kind of size that would push them into the bond market.
If the SME market is crying out for credit, that, to me, is a question that has to be addressed at the bank level, at the loan market. And in the loan market I think what Farid has pointed out is correct: spreads for the stronger credits widened so banks can’t price SME risk at the level it was before, so SME spreads have either widened significantly or credit is no longer available.
But that needs to be addressed separately from the attempt to deal with companies that on a stand-alone basis cannot qualify for a Double A rating. These types of capital projects lend themselves to a Danajamin wrap so they can be launched into the market. And like Ai Chin said, these would be the ones that will have that multiplier effect which the government was seeking.
IFR: Any follow-on comments from that before we move on?
Angus Salim Amran, Cagamas: Just to follow up on what Thomas was saying about the investor base. I agree that what really needs to be developed is the retail sector. Retail investors have to take an interest in the bond market. With any agency that’s in charge of wrapping bonds, you’re going to distort pricing. You’re not going to be able to price risk appropriately.
It’s going to be an arduous process to get retail to come in and buy bonds; it involves a long education process, I think insurance companies can play a role here. They can come in and wrap bond products for the retail sector and sell risk to them indirectly. So you could actually have credit enhancement on a certain insurance product which incorporates a Single A name and which bumps up the yield for the buyer.
So I think that longer term or medium to longer term, what we have to do is develop the bond markets from the investor’s standpoint so that we can actually take away the need to have Danajamin and start to look at Single A credits and let the market price risk appropriately. That’s the way forward.
IFR: That’s not going to happen overnight. What steps need to be put in place do you think for that to begin?
Angus Salim Amran, Cagamas: First of all, there is acknowledgement by all parties in the market that it has to be put into place. Bank Negara has played a pivotal role in coming out with the retail bonds that they’ve sold to the market. That’s the start of the education process. What’s the coupon, what’s the yield, how does it compare to the equity market? So I think that the process has started. But it’s going to take a lot longer.
The Securities Commission is looking at developing the retail bond market. We’ve said that some of the administrative processes that we as an issuer have to go through to sell directly to the retail market don’t make it worthwhile. So some of those processes can be watered down a bit; it doesn’t have to be so stringent when you come to disclosure or issuing a prospectus and all that, just to kick start the market. And as they kick start the market then they can look at how we make those processes more and more efficient. So as a start I think more can be done from that standpoint.
IFR: The issue of disclosure and transparency is a key one that often acts as an impediment for borrowers tapping the bond market. Are SME issuers part of the problem in terms of their lack of willingness to disclose?
Abdul Farid, Malayan Banking: You can actually divide the SME sector into two parts: the smaller or retail SMEs, and the next category, the commercial segment or emerging corporates. In reality, a lot of smaller SMEs have no proper documentation or properly prepared financials. But the smaller guys are easier in a sense because a lot of what the marketplace has resorted to is asset-based financing. For financial institutions that have proper retail SME credit scoring, it’s easier, too.
For the bigger SME guys, the emerging corporates or the commercials, where they would want to be treated as a corporate, the financials are typically quite challenging. So to a certain extent there will be pricing arbitrage because you can deal with the smaller guys, backed by their assets, almost as a property financing. And as you know, when it comes to asset-based financing in Malaysia and in the region right now, where real estate is very hot, there’s a lot of competition for financing right now. For the commercial segment it’s a bit more challenging.
IFR: Developing the theme of asset-based financing, I’m interested in how the panel sees securitisation as a financing option. There have been issues in Malaysia backed by residential mortgages and other kinds of receivables. On the basis that these can be tranched, and as an investor you can take down the kind of risk you’re comfortable with, does this market have a future in Malaysia?
Ai Chin Tan, OCBC: Obviously Cagamas is the biggest issuer in Malaysia. Besides Cagamas, in the past couple of years there have been securitisations of other asset classes, including auto receivables etc. Some have gone well and have some have defaulted. The variety of securitisation classes that are common in other markets have also been done here. But while the market is certainly here, it’s not as broad based as you see in more developed financial markets.
Abdul Farid, Malayan Banking: One of the problems with securitisation in Malaysia is that until today, there’s been no real urgency for financial institutions to try and manage their balance sheets by securitising assets to the marketplace. Not yet.
Thomas Meow, CIMB: But with Basel III being implemented, the demand to issue CLOs or ABS will grow. The challenge of managing return on equity is increasing. I’m quite hopeful the market will develop for these kinds of deals.
IFR: Let’s move on to infrastructure. Given the quantum of funding that projects are going to require, do you foresee any problems in Malaysia?
Ai Chin Tan, OCBC: Malaysia is unique in terms of its bond market and the fact that we are probably one of the only bond markets in the region that has provided significant volumes of infrastructure financing. We have actually done well in that respect. Most long-term infrastructure projects are funded through the bond market, be it power, water, coal, or others. So to that extent I’m very confident that the market is still receptive to project bonds.
Yeo Teik Leng, Standard Chartered Bank: I think infrastructure bonds will always have a place in Malaysia. A lot of investors and bankers have grown up with them. It’s something that people know and in general they perform quite well. Around 50% of bond market outstandings are infrastructure-related. I think we all agree that this is a very important part of the Malaysian capital markets. But that being said, I think the key is whether infrastructure projects will continue to be play as large a part in the economy going forward, because you get to a point where, like Japan, where you can’t build a train line to the middle of a paddy field, right? There’s only that much infrastructure that a country needs.
That needs to be framed in terms of government expenditure. The government clearly has a desire to reduce its deficit. So in that sense, the question becomes: can you then give concessions out to infrastructure companies? And if and when you do, what is going to be the public perception of that? And you have issues that can always come back and haunt you. That plays out in terms of toll increases, in terms of water tariff increases, even electricity price hikes. When all’s said and done, somebody has to pay for it, hence the question: do you really need that project?
That’s the bigger question. Of late, we’re not seeing the big-ticket infrastructure projects that we saw in the past. They’re frankly few and far between.
Maimoonah Hussain, Affin Investment Bank: But with the Economic Transformation Programme (ETP) that the government has in place, there is still going to be a continued need for infrastructure development in Malaysia. There are a number of projects that have been announced, or at least identified by the government, as the next phase of the 10th Malaysia Plan.
But a number of issues have arisen since the crisis. We haven’t seen a lot of power bonds, but the major focus now is on water bonds, which Promod mentioned at the beginning. This needs to be resolved. Investors need to know that something will be done about it because we’re talking about RM9bn of bonds out there, and it’ll be a huge problem if this it doesn’t get resolved. And it’ll have an impact on the infrastructure financing that’s going to be required from the capital markets in the next few years.
[Water companies in the state of Selangor - Syabas, PNSB, Splash and ABASS - face potential payment default on their due December 31 bonds because Syabas (the sole water distributor) was prevented from implementing a 37% tariff hike, which in turn led to problems between Syabas and water treatment concessionaires PNSB, Splash and ABASS, which supply it with treated water. All four borrowers are in technical default under their loan covenants.]
Angus Salim Amran, Cagamas: From a markets perspective, I think that there is infrastructure in the markets to cater for infrastructure bonds. We have a developed curve: we have a 20-year curve which is quite liquid, especially on the government securities side. The Cagamas 20-year bonds are also quite liquid. So I think that the infrastructure is there to cater for the longer-dated nature of infrastructure bonds. Liquidity, I think, will also be there. The government is trying to let the private sector take a lead in driving the economy towards developed-nation status. So I think we’ll probably see a little bit less government debt issuance moving forward and private sector infrastructure bonds will come in and take its place. So I think from that perspective I think there’ll still be enough liquidity in the marketplace to cater or to meet demand.
Promod Dass, RAM Ratings: When it comes to the large projects that are earmarked under the Economic Transformation Programme, at the end of the day all these projects have to make economic sense. They must be commercially viable. And even if they are critical for nation building, I suppose to a certain extent the government still has to play its part in supporting them. This is very important for investor confidence. At the end of the day, from the investors’ perspective, the viability of these projects must take paramount importance. That’s the only way that you can keep on building confidence because the infrastructure business works hand-in-hand with the bond market. Banks will not be able to fund 15 to 20 years into the future. You need the bond market.
Ai Chin Tan, OCBC: If you look at ETP projects, the key question is how do we build on the growth momentum in the Malaysian economy? I think there are two fundamental problems. First, FDI has come down to a record low. Second, private investment has come off from the kick-off at 30% to only 10%, so economic growth has been supported by public spending.
So what needs to be done to sustain economic growth next year? Do we expect continued capital inflows and if so, in which sectors? And the other thing is how to counter the negative impact of capital outflows from Malaysian corporates and government-linked corporations, which have gone regional and which is part of the reason capital outflow are greater than inflows? The economy will still be fuelled by public spending to a large extent, and of course the major part of it will be through the 12 National Key Economic Areas under the ETP.
