Malaysia debt markets report: Foreign issuers

Another major challenge for issuers is swapping funds out to the currency they actually need them in. Deutsche Bank brought Hyundai Capital to the market last year, in the first Korean ringgit deal for a corporate (as opposed to a bank); co-head of global risk syndicate Asia Jan Wipplinger recalls that period of time as being “flush with liquidity onshore.” Since then, though, “one of the challenges you are going to have this year in most local currency markets is liquidity on the cross-currency swap,” he says. “Foreign issuers coming to Malaysia have to swap into dollars for their funding needs. One challenge last year, and it remains a challenge this year, is that liquidity on the cross-currency side can at times be low.”

Soo agrees. “The issue they have is liquidity for cross-currency swaps,” he says. “All these companies are comparing their funding costs vis-a-vis what they would be able to get in the cash market.” Last year, those costs worked out favourably. “But now, in all cases the basis swap has widened considerably. Previously the ask-bid spread levels for the five year basis swap for dollar ringgit would have been 30 to 45 bps; now it is 160 to 180. It takes away a lot of the pricing advantage.”

Tan feels that foreign issuers will be good for Malaysia’s markets and investors, but that the swap issue stands in their way. “For the Malaysian bond market to attract more discerning foreign issuers, the bond market needs to be complemented with a deeper and more liquid swap market to ensure effective hedging and efficient pricing for these foreign issuers.”

There are also limits to the opportunities the Malaysian markets can represent at the best of times. “The other main constraint is that you cannot do big size funding,” says Soo. “So there’s liquidity, the investor base has alternative investments, there’s a preference for preserving capital, the challenges of being a new credit in the market, the premium, and also size.” He feels Malaysia’s focus is less on foreign issuers than Islamic capital markets (see separate article).

Some feel that the regulators and central bank are also becoming more insistent that a borrower has all of its funding covered in the swap market before issuing. Additionally, the foreign names that have come in so far have tended to be the ones that can’t do without a swap market, chiefly Koreans. Koreans have little choice but to comb the world for foreign currency opportunities; for a Singaporean issuer, it may make less sense to come if the swap market isn’t attractive at the time.

A final issue is that the markets that have provided foreign deals in ringgit in the past are arguably among the worst hit today. Korea’s financial sector and economy came under more scrutiny than any other in Asia when the credit crunch finally made its way this far east, and as for the Middle East, it seems a long time ago that it looked immune to the problems in global markets. “Given the direction Middle East economies have been going, I’m sure investors will expect a lot more” in terms of pricing before participating in a deal, says one banker.

While things are clearly tougher than they were, foreign deals can still get done. Once again Kexim has taken the lead on demonstrating that, with a RM220 million deal in March this year; whether it will prove a catalyst for other borrowers, Korean or otherwise, to try their luck remains to be seen.  “Our strategy is: let’s be a bit more opportunistic,” says Chay Wai Leong, managing director of RHB Investment Bank, which was lead manager on both Kexim deals. “Where there’s a window, we launch a deal. That’s how Kexim was done.”

Chay’s take on the swap market is a little different to those who feel it has become prohibitively expensive. He’s seen the market take off in different directions in between the first and second Kexim deals.

“We opened the door with Kexim and very quickly you saw a whole stream of bankers going to Korea and India to market all these deals,” Chay explains. “There was so much paper coming that the demand for swaps was very high, so treasury desks all took positions and all in one direction. The swap rate went all out of whack.” Chay says this year the situation has reversed. “You have a situation where everybody’s view is there’s not going to be any foreign issuers coming to market, so there’s no demand for swaps. So when we did Kexim [the second deal, in early 2009] we were faced with a few offers: a total reversal.” Although it is widely said in the market that swap pricing has become prohibitively, Chay says on the Kexim deal it was “all right” and maintained a funding advantage for Kexim over what it would have got elsewhere. “Both times we have raised money for them here it has been slightly cheaper than if they had done it in the international markets,” he says. “The first time 30-odd basis points, the second, roughly the same, maybe a little less.”