IFR Malaysian Capital Markets 2010: Part 1
IFR: Malaysia had a relatively good crisis and came through it in pretty good shape. Sentiment today in the domestic capital markets seems to be fairly robust, the economic metrics are looking OK, and the central bank has been quite pragmatic in its rate policy. Angus, what are your general thoughts?
Angus Salim Amran, Cagamas: I think that you’re correct when you say that Malaysia has probably done very well considering what’s happened in the rest of the world. I think it’s also very good to know that despite the fact that we’ve seen erratic growth in the US and the lingering Eurozone crisis, we continue to perform very well. I think the key for us and for Malaysia has been liquidity.
I think the lessons learned in 97, 98, the fact that we’ve put into place measures to counteract liquidity crunches that we experienced in the previous financial crisis held us in good stead this time round. So much so that we saw foreign issuers coming in and tapping the ringgit market when the offshore markets were closed to them. So I think the key for us or the key for Malaysia has been, and should always be, to keep liquidity flowing.
Promod Dass, RAM Ratings: Well, our GDP outlook is 7.4%, so we are expecting this year to be fairly strong. The key element for us has been the resilience of the banking sector. We do not have the same issues that we had during the Asia crisis of 1997. Capitalisation and liquidity have been strong and interest rates kept pretty low. These factors helped keep the Malaysian economy and the capital markets to some extent more resilient than what we’ve seen abroad. And while there was a slowdown in some sectors, as a whole we were able to ride the storm.
If you look at baseline sentiment, it’s positive across the board, but having said that, we do have some issues in some of the regulated sectors. There are some macro issues [around water sector restructuring] that we are still studying on a regular basis, and we downgraded some water bonds [in September]. This has affected sentiment to some extent.
IFR: Bank liquidity is very strong but is it providing corporates with their funding needs? And is strong bank liquidity squeezing out other segments of the local capital markets?
Maimoonah Hussain, Affin Investment Bank: If you look at the banking market, credit has grown in 2010, by easily up to 13%-14%, but a lot of this actually gone into the mortgage sector, into the consumer side, so much so that Bank Negara is considering whether they should introduce measures to dampen the housing market. Bank Negara is taking cues from the regional market, where Singapore and Hong Kong have introduced lower loan-to-values ceilings.
If you look at the top end of the credit market, there’s a lot of liquidity, but there are rumblings from the SME market, from the mid-tier market where bank appetite is still pretty tight.
IFR: That’s one of the key problems of Malaysia’s capital markets. Whether you look at loans, bonds or equities, it’s very top-heavy. There’s note a lot of focus on SMEs. Yeo Teik: are you comfortable with the steps being taken to deal with this?
Yeo Teik Leng, Standard Chartered Bank: I think building on what Maimoonah was saying and Angus to some extent, I think most of the people that are in the capital markets will appreciate that the Single A space, which is SME and middle-market space, has been closed for a large part for the last few years. The regulators have acknowledged that with the setting up of Danajamin.
In the Triple A and Double A market there’s a tremendous amount of liquidity. Capital markets transactions in that space are generally heavily over-subscribed, whereas the minute you mention a Single A name, liquidity drops off. It’s the same in the bank market; where SME borrowers don’t necessarily find a lot of liquidity support. And bear in mind that the syndicated loan market is the first port of call for borrowers before they go into the capital markets.
A lot of the loan syndications that we see tend to be for the better names. But as time goes by, you will see investors trying to move down the credit curve. And assuming that we don’t see defaults in the Single A sector or in the loans coming up for renewal, then potentially I think that that part of the market will come back again.
IFR: The chances of a Single A default should be pretty remote, right, Promod?
Promod Dass, RAM Ratings: It’s about 2.8% in the Single A space and 8% in Triple Bs.
IFR: And Yeo Teik: as the only foreign bank representative on the panel, how do you see the regional flows and particularly the inflows of foreign capital into this market? The numbers suggest there’s a lot of foreign money coming in, although I guess by the same token a lot of money flew out during the crisis. How do the two square up?
Yeo Teik Leng, Standard Chartered Bank: We can probably break this into two parts. One part relates to the more speculative capital flows, the other to the stickier-type flows. Clearly in terms of speculative flows, the fact that we’re seeing almost 25% government bonds in foreign hands clearly suggests there is a play on the ringgit. In Thailand it’s a similar play; almost 20% of Thai govvies also are in the hands of foreign parties.
So clearly the cyclical play is Asian currencies at this point in time. So I think in that respect clearly liquidity is there and liquidity is happening to park money in countries like Thailand and Malaysia. In some sense the answer to your question depends on your short-term view. I think the short term economic and credit view is positive, which is attracting these speculative flows.
Building on that, the next question is what about longer-term capital flows? The government clearly is keen on bringing more capital into the country. I think that one thing that seems to be missed is the local liquidity that we’ve all been talking about is almost counter-cyclical in that you see foreign names coming to Malaysia, raising a lot of money and taking it out. So we have a situation where Malaysian liquidity now is being recycled externally.
Because there is a significant amount of liquidity locally, I’m not so sure whether even more is going to make much of a difference. And even if it does come in, where can that it be employed locally? We’re seeing a lot of big corporates moving outside Malaysia to generate growth because growth is no longer all local.
IFR: Farid, on this theme of liquidity falling off a cliff when it comes to the lower rated classes, is it the case that investors here don’t have a credit culture or don’t understand risk pricing, or have they just being burned by history? Why is this difference between top-rated and lesser-rated debt so stark?
Abdul Farid, Malayan Banking: I think maybe it can be explained in part if you take a look at what happened in 2008. If you look right across Asia - including Triple A countries like Singapore - when the crisis came in full force in early 2009 a lot of liquidity disappeared, not just portfolio flows but on the banking side, too. Domestic and regional players started seeing net margins or credit spreads for the best-rated names widen. So it’s a simple case of high-quality credit offering better spreads. Subsequently, yield-seeking portfolio flows from the West, much more comfortable with the economic outlook for the region, flowed into the same segment of the market in virtually all the countries in this region, Indonesia, Malaysia, Thailand, Philippines.
People are still risk-averse, which is keeping cash away from the SME sector - even though credit spreads have narrowed for prime names. And because banks are working towards Basel III, they are just being careful.
IFR: So in the meantime then Ai Chin, we have the government’s Danajamin initiative, which on the surface looks like a good one. In a sense though, at the same time as it’s trying to introduce a notion of risk culture, it’s undermining it by offering a government guarantee. Presumably for issuers, it’s cheaper to pay a guarantee fee than to pay risk pricing in the private debt market. What is Danajamin adding to the market?
Ai Chin Tan, OCBC: This is a very challenging question so I’ve got to be careful here. Well obviously if you look at the way the market has evolved, as mentioned just now, credit appetite for lower-rated paper has disappeared from the bond and loan markets so something needed to be done to assist companies in this segment. The setting-up of Danajamin meets that requirement.
The initiative had been talked about for a long time, but when the market is hunky-dory, the need to create financial insurance is less urgent. With the crisis came the opportunity to build on this platform. I must say that they have done well in looking at supporting the mid-tier names. Obviously they’re not going to credit wrap very low-rated companies because they need to ensure that their rating is preserved as well. So they’ve looked at creditworthy companies, but what they’re essentially doing is making sure that these creditworthy companies can tap the market at an optimal level.
This is different to what you see in other regional markets. If you look at Singapore, you don’t see credit-wrapped bonds. This is particular to Malaysia and showcases the evolution of the bond market over the years: from stand-alone issuance to bank credit-wrapped paper back to a stand-alone market during the good times, and when the crisis hit, a hero emerges in the form of financial insurer Danajamin to provide credit support.
It’s important for us to continue to build on the success of the Malaysian bond market. We used to be the second or the third largest in Asia, and it’s important for us to rebuild confidence in the market and that’s what I think Danajamin has done. But if you ask whether this is sustainable over the long term, I think it’s important eventually to look at how credit risk can be assumed by investors.
IFR: That’s the point really. What Danajamin is offering in effect is cheap government-guaranteed debt and the government bears the credit risk. Is this perhaps not the best way to proceed, Thomas?
Thomas Meow, CIMB: Since I’m at the end of the line, I was wondering what kind of question you would ask. I’m not going to comment on what Danajamin is doing, to be politically correct, so I will express my views in terms of what will help the Single A market develop. I don’t think it’s a matter of demand. There haven’t really that many issues out in the market so that’s a difficult charge.
I find it quite strange that Malaysia has a very developed equity market, and most listed companies are in the Single A category. So theoretically if investors have appetite for the equity risk of these companies, why are they not interested in Single A rated bonds issued by the same companies? I think investor distribution is the problem. Regulators should come together to see how we can develop this market a bit more. Compared to markets like Thailand, Indonesia, Singapore, I think we are a bit behind in terms of developing the retail bond market.
In those countries, household names are quite acceptable to retail bond investors. So I think there’s a need to develop this market to fill the liquidity gap in the Single A sector. I think Danajamin should focus on companies that are able to tap the bank market but which don’t have access to the bond market. So how can Danajamin come up with a pricing framework that can provide bond market access to these SMEs? I think that’s crucial.
In talking about high-yield names, diversification is the name of the game. If Danajamin can play an effective role disintermediating the SME sector, that’s good for the market. In the past, we could look at CLO structures, but most of the few CLOs that we saw in the past ended up in trouble so there’s a mindset problem with institutional investors that we need to overcome.
Promod Dass, RAM Ratings: Can I just add to that? I think the other observation you can make is yes there is a strong appetite for paper rated Double A and above, but on the same point I think the key question is: are there enough investors in the market who want to look at Triple Bs or below?
I ask this question because when you look at it from a different angle, when banks sell non performing loans, there are takers. Whether they are foreign investors, there is this special group of investors that will come in and look for lower-rated paper and be comfortable with the higher risk. When you look at banks, insurance companies, funds, they have a very high degree of risk aversion. I think most of them would have maybe an A1/Aa3 minimum requirement to hold paper. I’m not sure for all banks but generally speaking that would be true.
So the question is perhaps whether there should be a new fund or perhaps a different sort of investor should enter this market. I don’t think you will get funds or banks or insurance companies to change their appetite because a lot of it is regulatory-driven and you want such institutions to have a strong profile.