MARC: Corporate bond issuance to drop on slower investment, GDP growth


Corporate bond issuance in Malaysia is expected to decline between 13% and 23% year-on-year (YoY) in 2019 on slower investment and economic growth, but government issuance is projected to rise, said Malaysian Rating Corp Bhd (MARC).

The rating agency said it anticipates corporate bond issuance to moderate to between RM80 billion and RM90 billion this year — lower than the RM103.9 billion corporate bonds issued in 2018.

“The forecast is premised on lower growth of public investment, a more moderate real GDP growth of 4.6% and slower pace of global investment,” it said in its report

“We also expect a material decline in gross issuance of unrated government-guaranteed and infrastructure-related corporate bonds following the government’s reprioritisation efforts.”

MARC noted that 2018 saw total corporate bond issuance in the primary market fall 15.4% YoY to RM103.9 billion, largely owing to a substantial drop in the unrated segment.

Both unrated corporate and government-guaranteed bond issuances declined YoY by 32.8% and 23.7% to RM13.9 billion and RM28.7 billion respectively in 2018, as prospects of higher financing costs and cancelled mega infrastructure projects dented issuance activity.

Rated corporate bond issuance also declined last year to RM52.4 billion against the RM55.8 billion issued in 2017 though Cagamas Bhd bonds rose to RM9 billion (RM8.7 billion in 2017).

In contrast, MARC forecast total gross issuance of the Malaysian Government Securities (MGS) and Government Investment Issues (GII) to be between RM115 billion and RM125 billion in 2019 versus the RM114.8 billion issued last year.

“The forecast is premised on the government’s projected budget deficit of RM52.1 billion, as well as higher volume of matured MGS and GII papers (predicted at RM69 billion in 2019 against 2018’s RM62.8 billion),” it said.

This would continue the momentum observed in 2018 as gross issuance of MGS and GII grew 0.8% YoY from the RM113.9 billion registered in 2017, with GII papers comprising 56% of the total issuance.

MARC said bidding interest improved markedly in 2018 as total bids received for MGS and GII issues rose 14.9% YoY to RM228.9 billion.

“As a result, the average bid-to-cover ratio for both MGS and GII papers improved to 2.3 times compared to 2.1 times in 2017.

“Demand was mostly supported by bargain hunting activities from local institutions despite surging yields in the secondary market amid heavy foreign outflows,” it said.

However, the rating agency said yield upside in the secondary market for both MGS and corporate bonds will be limited this year due to subdued domestic and external stimulus.

“Going forward, we expect the upside of yields to be capped by a low inflation rate, the expectation of an Overnight Policy Rate cut amid weaker growth prospects and limited upside of US Treasury yields as the rate hike pace slows,” it said.

It added that 10-year MGS yields are expected to range between 3.9% and 4.4% in 2019, while net foreign outflows are likely to moderate.

“This is attributed to the gradually increasing clarity in the Malaysian government’s macro policies going forward, a slowdown in the pace of interest-rate hikes in the US and the increased stability of the ringgit,” it said.

MARC noted that net foreign outflows from the local bond market surged to RM19.6 billion in the first 11 months of 2018 compared to only RM11.6 billion in the corresponding period in 2017.

This brought down total foreign holdings to RM187.1 billion over that period, while foreign ownership of local bonds fell to 13.3% against the 15.9% noted in the corresponding period in 2017.