IFR Asia Malaysia debt markets report, April 2009

A year ago, Malaysia was enjoying a remarkable influx of foreign issuers raising capital in the ringgit debt markets. As G3 credit markets locked up and Asian issuers began to look for the widest possible range of funding sources, Malaysia seemed to have seized an opportunity to prove its depth, sophistication and flexibility.

One year on, it doesn’t look quite so rosy: investor appetite has changed as it has all over the world, and swap market pricing has turned against most potential issuers. But even in this environment deals are getting done, and Malaysia’s role as a credible funding source for foreign issuers is likely to remain a permanent fixture when the dust settles on today’s market volatility.

Foreign issuance in ringgit debt dates back to the Asian Development Bank in 2004, or arguably even to the Shell Islamic private placement back in 1990, but last year’s cluster of issues was kicked off by Export-Import Bank of Korea, or Kexim (see deal profile). The RM1 billion Kexim raised in five and 10-year funding in March 2008 through RHB, CIMB and OCBC demonstrated clearly that the bulging liquidity in Malaysia was prepared to find a home in foreign paper, provided it was the right kind of paper.

By April it had been followed by a RM1 billion three-tranche deal from Industrial Bank of Korea, led by RHB and CIMB. This was in some respects a similar deal: a Korean policy bank, with state backing, which was enough to give Malaysian investors comfort about the creditworthiness of the issuer. Later deals, though, would show a greater daring among investors. Hyundai Capital Services, a corporate borrower with no state backing (but part-owned by AAA-rated GE) raised RM650 million through Deutsche in May, followed later that month by a three-tranche, RM530 million deal for Woori Bank through RHB and CIMB.

Alongside this Korean influx came some promising signs that Gulf institutions were willing to issue in ringgit. In January 2008 Gulf Investment Corp succeeded in raising RM1 billion in a dual tranche deal led by ABN Amro (now RBS) alongside RHB Bank and Standard Chartered; GIC is an investment company owned by the six nations of the Gulf Cooperation Council. This was a conventional issue, and was followed in August by a sukuk from Islamic Development Bank, which raised RM300 million for IDB projects in Malaysia in an issue of five-year notes. CIMB and Standard Chartered led this deal.

But these were the good times: high liquidity, investor appetite for foreign names, attractive pricing both in terms of the local markets themselves and the swap markets to get the proceeds out again. Nothing good lasts forever, and it didn’t.

Markets are nothing like as easy now for foreign issuers as they were then. “Liquidity for foreign issuers is becoming very limited, for a few reasons,” says Seohan Soo, head of debt capital markets at AmInvestment Bank. The first is that there are very good opportunities for investors among local issues. “If I invest in Cagamas rated bonds today, I’ll get MGS plus 80 to 95 basis points for a 10 year deal. There’s no compelling reason for investors to take riskier assets for a slightly better return.”

Besides, investors are focusing on protecting capital (hence the flood of government guaranteed bonds in the market – see the next article for more). “So investors are looking at local issuers whose credit they are familiar with, and they have the comfort of knowing that the assets reside in Malaysia. On the other hand, if you buy a bond from a Korean state-owned bank with zero assets in Malaysia, a credit downgrade or default would actually be a much bigger risk for them. This is an added disincentive for investors to invest more in foreign names.”

Tan Ai Chin, head of investment banking at OCBC Malaysia, adds: “There is still a market for foreign issuers but investors are a lot more cautious about the underlying credit profile of the issuer and also the economic fundamental of the domicile country.” In her view it is unfortunate that most of the foreign issuers who have come to market have been financial institutions, which is probably the sector under most scrutiny from investors today.

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