By Emmanuel Samarathisa
AVIATION, oil and gas (O&G) and trading and services were among corporate bond issuers that might see “higher risk to their credit positions”, the Securities Commission (SC) said.
While acknowledging that default rates in the corporate bond market had “declined significantly” since the 1997-98 Asian financial crisis from 9.4% to “below 1% up to last year”, SC executive director (market and corporate supervision) Kamarudin Hashim said that due to uncertainties, in particular the Covid-19 crisis and slower global growth, several issuer segments might be affected.
“Based on our discussions with market participants, the areas include aviation, O&G as well as trading and services,” Kamarudin said in a press conference today in conjunction with the release of the SC’s 2019 Annual Report.
These segments under stress, he added, represent around 8% of total corporate bond issuances. But “it is important to emphasise that issuers within these segments may experience some financial stress in the short term that could weaken their credit positions, but not necessarily default as the majority are in the AAA and AA rating categories,” he said.
According to Kamarudin, in the event of credit deterioration, there should be sufficient buffers before cash flow becomes severely constrained.
“Several of these issuers with these segments have some form of support, be it financial guarantees, corporate guarantees or Danajamin guarantees,” he said.
Also, as investors in the corporate bond market were predominantly institutional investors, in the event of a default, they would be able “to pursue various options” to preserve their investments through negotiation for rescheduling or restructuring of the debt or pursuing contractual rights and priority of claims against the issuer, Kamarudin said.
But he stressed that the SC was of the view that a prolonged weakening of the issuers’ cash flow would be a cause of concern and that the regulator “would continue to monitor that space”. – April 16, 2020
