Malaysian capital market seeing some signs of life

By YAP LENG KUEN

CEOs: Firms in bond market more for refinancing

PETALING JAYA: The capital market is seeing some signs of life although new money is yet to enter in a big way.

“Corporates are coming back to the bond market more for refinancing and not so much for new financing,” said Lee Kok Kwan, deputy CEO and group treasurer of CIMB group.

“The market for the raising of new money seems more vibrant in Hong Kong, Singapore and South Korea,” said RHB Investment Bank managing director Chay Wai Leong.

Corporate funding for mergers and acquisitions as well as business expansion was still lagging while there is some project financing for toll roads and public transportation, for which funds are provided under the Government’s second stimulus package. Other funding purposes are for working capital, trade financing and plant refurbishment.

Within the equity market, there is more interest from corporates to raise funds especially via private placements and rights. “This is due to pent-up demand from the corporates which had deferred plans to raise funds in view of the depressed market prices and overall soft sentiment,” said AmBank group relationship banking and regional business managing director Pushpa Rajadurai.

However, she noted that funding via initial public offerings (IPOs) had shrunk from their highs in the 2002-2005 period when about 70 IPOs with an average value of RM6.8bil were launched yearly.

Last year, only 21 IPOs with a total value of RM1.2bil were launched, representing a drop of 80% in the value of funds raised.

Year to date, there is only one IPO, Samchem Holdings Bhd.

There is still a lack of large IPO and primary share placement deals, said Chay, adding that the SunCity and CapitaLand real estate investment trusts could be the next big listings to look forward to possibly around year-end.

Even within the bond market, banks are shoring up funds to boost their Tier 1 and 2 capital, however, for senior debt (debt that takes priority for repayment in the event of liquidation) funding, it is mostly in the negotiable instrument of deposit (NID) market, Lee observed.

(NIDs are mostly used by banks for lending and borrowing between themselves and sometimes by fund managers as well as very sophisticated corporates).

The action is concentrated mainly on high grade government and quasi government-related bond issues. According to Chay, RHB is eyeing potential deals in high grade bonds.

“We have observed a return of top tier issuers in exploring fund raising exercises in the last quarter. “These issuers were attracted by the low interest rate environment and continuing liquidity for high quality credits, especially issuers rated AA and above,’’ said Maybank-IB head of debt markets, John Chong.

There are also proposals from firms in property, construction and infrastructure for issuance of bonds with a potential for better credit rating based on guarantees provided by the Government’s financial guarantee institution (FGI) Danajamin Nasional Bhd.

“The introduction of Danajamin as an FGI is expected to spur further issuances in the capital market,’’ said Chong. Even before the full launch of Danajamin, Maybank-IB has received many requests and queries from various corporates to explore the possibility of issuing FGI-wrapped corporate bonds.

“In fact, lead managers are keen to work with Danajamin to enable some of the smaller companies to obtain a credit wrapping,” Lee said.

Corporates still prefer the debt over the equity markets although risk appetite seems to have returned, to some extent, to the equity markets, said Lee. In equities, they experience more dilution whereas for debt, they pay a long-term fixed rate and only have the pricing and access issues to deal with.

Moreover, just because some large rights issues were over-subscribed did not mean that all equity issues would succeed at this point, said Pushpa. “We continue to see existing shareholders lending support to funds raised in such exercises.’’

In view of the long-term appeal of bonds, it was even more imperative for regulators to get the retail market going for high grade bonds, said Lee, noting that they had been recently making enquiries in this area.

In the absence of the corporate bond alternative for single-A rated corporates, direct bank lending remains the current viable option even though the cost of funds might be higher, said Chong.

“The bank loan market has always been an important source for corporates to raise funds and even in times of economic weakness observed in the last one to two years since the subprime crisis emerged, the direct lending and syndication market has been resilient,”’ said Chong. The direct bank loan sector is expected to play an even larger role in times when the overall capital market is in a recovery mode.

According to Pushpa, corporates that were well-positioned to borrow would stay in the loan market in view of the current low interest environment, while banks were still extending loans to those that showed the right balance of risk and return.

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