Innovation to spark bond market interest
Cheah Chor Sooi 
Danajamin is injecting confidence into 'non-triple A' issuances by partially guaranteeing certain transactions which have been accepted by investors, says Nazri

Danajamin Nasional Bhd is seeking to guarantee more bond issuances that have an exposure to an issuer’s standalone credit risk.

This will give investors more options to participate in the bond market. A standalone credit risk is the risk associated with a single operating unit of the issuer’s company or asset.

In recent times, Danajamin has been injecting confidence into “non-triple A” issuances by partially guaranteeing certain transactions which have been accepted by investors.

“Triple A” or AAA bonds are those considered safe bets by the bond rating agencies responsible for determining their grade. In other words, the bond rating agencies are signalling that they think default, ie investors not getting the money they were promised, is very unlikely to happen except in the most remote of circumstances.

Recent Danajamin-supported issuances wherein investors have to bear or are exposed to a certain degree of an issuer’s credit risk are that of Northern Gateway Infrastructure Sdn Bhd and TRIPlc Medical Sdn Bhd (in the case of both companies, Danajamin’s guarantees are specifically meant to mitigate construction risk).

Similarly, in its quest to allow investors to take up more standalone corporate risk, Danajamin has also guaranteed the junior tranche of the Purple Boulevard Bhd transaction, thus enabling investors to subscribe to the senior tranches which were not guaranteed by a third party.

“Our emphasis moving forward will be grounded in our developmental agenda where we will continue to vary the application of our guarantees in order to bring financially-viable companies to the capital market but at the same time also develop rating diversity in the market,” Danajamin CEO Mohamed Nazri Omar tells FocusM.

“Nevertheless, it does not preclude us from continuing our existing method of using our guarantee by providing full-tenured guarantees to viable companies.”


Credit standing

To-date Danajamin has guaranteed 32 bond and sukuk (Islamic bond) issuances by viable corporations. A majority of the transactions involve those that are fully guaranteed by Danajamin for the entire tenure of the issuance (ie the investors will be exposed only to the credit standing of Danajamin during the tenure).

Since its inception in May 2009, the sectors that Danajamin has most actively participated in include real estate, infrastructure, oil & gas (O&G) and consumer-related products.

“We plan to issue from other sectors as well in the near future,” envisages Nazri. “Notwithstanding this, we are cognisant that certain sectors, eg infrastructure projects, are generally well-suited to be funded via the bond market given the long-termed cash flow profile of such projects.”


Market projection

Outlook-wise, RAM Ratings economist Kristina Fong expects gross issuance activities of the bond market to remain robust next year for both the government and corporate sides. Government issuance is expected to mirror a similar level to this year’s activities with gross issuance of RM100-110 bil on preliminary estimates.

Fong expects gross issuance activities to remain robust next year for both the government and corporate sides

“Gross corporate issuance should record another healthy year of about RM90-100 bil attributed to a sturdy pipeline of new issuances expected primarily from the financial institutions and infrastructure sectors which form over 60% of issuances in the market,” she says.

As of end-September, the government issuance has reached RM85.5 bil, in line with RAM Ratings’ full-year expectations of RM100-110 bil. Gross corporate issuance is also on track to reaching the rating agency’s expectations of RM95-105 bil with RM84.4 bil issued year-to-date as of end-September.

RHB Asset Management Sdn Bhd (RHBAM) foresees the local corporate bond/sukuk market to be weighed in by investors turning cautious amid external uncertainties posed by the US Federal Reserve’s rate hikes and the normalisation of interest rates by central banks in the advanced economies.

Moreover, it also observes that the spectre of bond defaults and debt-restructuring that took place previously in the O&G sector has continued to linger on investor sentiments even till today.

“That said, we are generally still upbeat on the corporate bond and sukuk market as we think the overall credit trend will be stable in the foreseeable future especially against a backdrop of stronger economic growth,” says RHBAM managing director Eliza Ong Yin Suen.

Ong expects the sukuk market to remain the primary asset class of choice for Islamic real money managers such as the national pension funds, insurance companies and asset managers

With an improving economic outlook, the credit fundamentals of corporate bond and sukuk issuers should prove resilient if not strengthen.

RHBAM expects another year of robust pipeline for corporate bond/sukuk issuance next year following a strong showing of around RM95-100 bil this year.

“Infrastructure or project finance bond/sukuk offerings should continue to dominate the primary issuance space and rightly spill over into 2018 as infrastructure spending remains upbeat,” reckons Ong.


Emphasis on diversity

On the way forward, Danajamin’s Nazri stresses the need to improve broader access and efficiency of the debt capital market – both conventional and Islamic.

“In order to stimulate growth of the debt capital markets, the focus should shift towards encouraging more diversity to give investors varied choices to meet their risk-return profiles,” he points out. “Such a move will promote financial inclusion where access to the bond market can be extended to a broader range of companies as an alternative to the banking sector.”

RHBAM’s Ong expects the sukuk market to remain the primary asset class of choice for Islamic real money managers such as the national pension funds, insurance companies as well as asset managers despite the possibility of interest rate hikes by Bank Negara Malaysia (BNM) next year.

Should BNM decide to hike interest rates, it will be bear for the sukuk market sentiment, which in tandem, could spur yields higher.

“Notwithstanding, this knee-jerk of rising yields could reverse as support for the sukuk market remains bullish and buyers will re-emerge to ensure they stay invested due to the scarcity of sukuk to meet increasing demand,” she reckons. “Any upward movement in yield curve is an opportunity to accumulate and increase one’s investments in the sukuk space.”

More broadly, the appetite for sukuk garners a much larger investor base as it is able to tap both conventional and Islamic bond investors. There is also a greater motivation for issuers to tap the Islamic capital market for funding in the form of tax incentives.

‘Top-down’ approach in pushing the Islamic finance agenda is pivotal for Malaysia’s commendable sukuk performance, says Ruslena

RAM Ratings Islamic finance head Ruslena Ramli sees the “top-down” approach in pushing the Islamic finance agenda as pivotal for Malaysia’s commendable sukuk performance.

“The next phase of growth for the Islamic finance landscape is via the environment, social and governance [ESG] and the sustainable and responsible investing [SRI] framework,” she enthuses.

According to United Nations Principles for Responsible Investment (UNPRI), nearly US$70 tril (RM296.1 tril) in assets under management (as of end-September) are moving towards the incorporation of ESG factors in investment decision-making through screening, integration, thematic investments and active ownership.

Two prominent sukuk issues which were issued under the SRI framework include Malaysia’s first SRI sukuk in 2015 by Khazanah Nasional Bhd – namely, Sukuk Ihsan – of which the proceeds were channelled to a non-governmental organisation to improve the accessibility of quality education in government schools.

The second issuance in July this year was Malaysia’s (and also the world’s) first green sukuk under the SRI framework by Tadau Energy Sdn Bhd to finance a large-scale solar project.

Volatility key challenge to bond market

ALTHOUGH primary issuance activities for funding seem intact, the main challenge for the bond market moving forward will stem from global uncertainties which may affect the volatility in foreign investor flows.

Uncertainties concerning geopolitical developments, changes in foreign policy and domestic developments such as tax reform in the US and Brexit (British exit from the European Union) outcomes in the UK and the EU will continue to influence global liquidity flows, according to RAM Ratings economist Kristina Fong.

Currently, foreign investors hold 42.8% of the outstanding Malaysian Government Securities as of end-September, the largest component of Malaysian bond holdings in their portfolio.

Furthermore, as industrialised economies are expected to continue with interest rate tightening measures next year, this may also contribute to some dampening in foreign inflows to Malaysia and the region.

“We would expect this to contribute to some rising pressure in yields, but do not deem this to be destabilising to the domestic bond market issuance activities,” envisages Fong.

That said, the extent of market volatility will be curtailed given the current profile of foreign investors.

About 55% of the foreign investors of Malaysian government bonds are of the “sticky” type comprising central banks, governments, pension funds and insurance companies which are less reactive to sentiment changes than portfolio investors who are more responsive to longer-term fundamentals, adds Fong.

This article first appeared in Focus Malaysia Issue 258.