Bond market sees more downgrades than defaults

The debt default risk may be misplaced due to financial resilience


THE economic fallout triggered by the Covid-19 outbreak could likely see more bond downgrades in the country and slimmer chance for defaults.

The immediate risk for emerging economies such as Malaysia is economic damage dragged by the virus, but the debt default risk may be misplaced due to financial resilience.

iFAST Capital Sdn Bhd fixed income analyst Ganageaswaran Arumugam said the Malaysian corporate bond market has been fairly stable with no major defaults since 2017, according to data from local rating agencies RAM Rating Services Bhd (RAM Ratings) and Malaysia Rating Corp Bhd (MARC).

“Much of this stability is due to strong corporate fundamentals which on average have a fairly low geared balance sheet. In my opinion, I do not see bond defaults occurring amid the challenging economic situation,” he told The Malaysian Reserve (TMR) yesterday.

Ganageaswaran noted that the ringgit corporate bond may suffer rating downgrades or outlook revision, especially of companies operating in sectors such as ports, automotive, and oil and gas (O&G), given the uncertain impact of Covid-19, oil prices and market share war between Saudi Arabia and Russia.

“While sector outlook is an important driver of these outlook revisions, the ultimate verdict of these outlook revisions/downgrade/upgrade would still depend on the fundamentals of the company itself,” he said.

MARC chief economist Nor Zahidi Alias said the local credit rating firm expects yields to be on an upside bias in view of the widening fiscal deficit, weakening ringgit and sluggish oil prices that could sap foreign demand amid the flight to safety in the near term.

“However, some of the yield pressures will be mitigated by buying support from local investors amid increasing liquidity in the banking system and easing policies of Bank Negara Malaysia (BNM).

“As a result, we expect yield curves to steepen further as there are expectations of more cuts in the Overnight Policy Rate keeping yields at the short end relatively low,” he told TMR.

Gross issuance of Malaysian Government Securities (MGS) and Government Investment Issues (GII) rose to RM38.8 billion in the first quarter of 2020 (1Q20) compared to RM36.5 billion in the same corresponding period last year, according to MARC.

“We expect the gross issuance of MGS and GII for 2020 to be significantly higher than last year, between RM140 billion and RM150 billion.

“This is in view of widening fiscal deficit amid a shortfall in government revenue due to low crude oil prices and the RM25 billion fiscal injection,” Nor Zahidi said.

As for corporate bonds, gross issuance fell to RM22 billion in 1Q20 from RM26.4 billion in 1Q19.

“For 2020, we expect the total gross issuance of corporate bonds to be circa RM95 billion to RM105 billion, lower than 2019’s level.

“Our forecast is premised on the expected slowdown in GDP growth and a contraction in private investment which will affect corporates’ appetite to raise more funds,” Nor Zahidi added.

RAM Ratings technical director Siew Suet Ming said 2Q20 will be interesting for portfolio fund managers in assessing risks and repositioning investments.

“RAM Ratings has made public its impact analysis arising from Covid-19. Obviously, there are sectors that are impacted negatively which may be subject to re-rating.

“However, the Malaysian capital market is robust, and the sukuk and bond market especially is among the best in Asia. There will still be new issuances by companies in the right industries given the favourable interest rate,” she told TMR.

Siew noted that the credit ratings and research firm has revised its corporate bond issuance downwards for the year, given the weaker economic prospects.

“Given the overall market uncertainty and question mark over-issuance appetite and extent of investors’ risk aversion, it will be at a wider range of between RM80 billion and RM95 billion from our earlier forecast of RM100 billion to RM110 billion.

“We expect this to be offset by a higher MGS/GII issuance of RM125 billion-RM135 billion (from RM115 billion-RM125 billion), taking into account the wider budget deficit due to increased development expenditure following the release of the second stimulus package,” she said.

As at end-1Q20, a total of RM22 billion was issued, according to RAM Ratings. In March alone, a total of RM7.2 billion of corporate bonds and RM1.8 billion of quasi-government bonds were issued.

Some of these were pipeline issuances from late last year that spilled over into 1Q20 or work-in-progress transactions that were already planned.

For example, Cagamas Bhd’s recent RM450 billion bond issuance, AmBank Islamic Bhd (RM1 billion) and Prasarana Malaysia Bhd (RM1.4 billion), ahead of the Movement Control Order (MCO) gazette, and escalating global economic shutdowns.

Year-on-year, the 1Q20 bond volume was about 20% lower than 1Q19 Siew said.

RAM Ratings’ impact analysis of its rated portfolio indicates close to half of the portfolio is stable, with just 6% of rated credits at “high” risk against the Covid-19 pandemic.

“The rest of the portfolio shows some moderate risk, with mitigating factors that will help sustain the issuers through the MCO-induced stress.

“That said, the unique and unparalleled circumstances are complex and still fluid, necessitating more frequent assessments of credit impact.

“Credit deterioration is inevitable, especially for vulnerable sectors like tourism and leisure, aviation, retail and O&G,” she said.

Siew said the severity, however, will depend on how markets respond to the various stimulus measures rolled out by the government and BNM, and how long the healthcare crisis will drag.

“In this current crisis, adequate access to liquidity will be critical — especially for weaker credits — with the collapse in many core markets and supply-chain disruptions as many parts of the global market are in a standstill,” she said.


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