The MTN issuance is a means for companies to raise long-term funds in the capital market

by SHAZNI ONG/ pic by BLOOMBERG

THE local bond market continues to be vibrant with yields coming down as investors sought safe havens after a disappointing stock market performance so far this year, analysts observed.

In the past one month alone, despite the challenging business and economic environment, companies such as Genting Bhd, Perak Transit Bhd and Atrium Real Estate Investment Trust have announced plans of issuing medium-term notes (MTNs).

Genting in a filing to Bursa Malaysia on Sept 17, said it was issuing RM10 billion in bonds to cover operating expenses as well as for capital expenditure (capex) and investments.

In a filing a day later, Atrium announced its plans to raise up to RM999 million by establishing an MTN programme to part-finance the purchase of properties in Penang.

On Sept 20, Perak Transit Bhd announced its plans to issue RM300 million sukuk murabahah next month, with the proceeds set to be used to refinance existing borrowings, and finance the company’s capital expenditure and working capital for existing and new projects.

The unrated sukuk murabahah will be the first tranche of Islamic notes to be issued under Perak Transit’s RM500 million 15-year Islamic (MTN) programme, the company’s first such undertaking.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the MTN issuance is a means for companies to raise longterm funds in the capital market.

“In 2018, the total issuance of MTN was RM94.8 billion from RM114.3 billion in 2017. In that sense, nothing is alarming about the prevailing trend. Perhaps, the expectation of a lower Overnight Policy Rate (OPR) going forward may have enticed companies to issue MTN since a lower interest-rate environment would mean lower borrowing costs,” he said.

Mohd Afzanizam added that thus far, the bond market has been quite positive with yields generally quite low.

“This is very much in line with the OPR being reduced by 25 basis points in May. The question of further cuts in the OPR will continue to excite the bond market, especially when the global economic prospect is not looking up,” he stated.

The European Central Bank has reinstated its quantitative easing measures recently and the US Federal Reserve may slash its Federal Fund Rate by another quarter-point by the end of the year.

This lower interest-rate regime will bode well for the fixed income market. “At the very least, companies issuing debt instruments know there is an appetite for investors to subscribe to their debt instruments,” Malaysian Industrial Development Finance Bhd (MIDF) research head Redza Rahman said.

He stated that with cheaper rates, it makes sense to raise funds, either to roll over expiring (and at higher rates financing) or even sourcing fresh funding for the expansion of plants or capex or even potential merger and acquisition activities especially with the equities market not doing that well.

“An uncertain movement of share prices might not sound attractive to investors to plough more into a listed company through rights/private placements. Therefore, raising funds from the fixed income market is ideal, especially when the issue has exhausted its financing facilities with financial institutions,” he said.

According to Bain & Co’s latest report entitled “A Downturn Favours the Prepared, Even for South-East Asian Companies”, despite a long run of strong economic growth in Malaysia and South-East Asia, the next global recession will have serious effects here.

The report’s co-author Francesco Cigala said Malaysia relies substantially on exports to China, the US, Europe and elsewhere, as well as capital flows from abroad.

He noted Malaysia weathered the global financial crisis a decade ago much better than many other regions did but it was hit harder than most other countries in South-East Asia, with its GDP falling from 6% in 2006 to negative 2% in 2009,” he said.

Cigala added that many of the traits that cushioned Malaysia then offer less of a buffer today. Malaysia’s economic growth rate has fallen 0.9 percentage points from 2006 to 2018. Turning to exports, with a seven-percentage-point increase since 2006 in the share of Malaysia’s exports that go to China, the country is more exposed to China, where growth has almost halved.

The ongoing US-China trade war might further slow China’s growth he stated, while contribution from commodities to Malaysia’s GDP has dropped from 30% to 21%, and prices could fall further.

“In addition, Malaysia’s corporate and household debts have risen significantly in GDP, from 115% to 134%. The combined effect of these structural shifts means that Malaysia is more exposed than countries such as Laos that depend more on domestic demand,” Cigala noted.