Monday, 29 February 2016
Capital flowing back to Malaysia
BY TEE LIN SAY
Investors desperate for yields are turning to the dollar sukuk market
AFTER a dry spell, coupled with the hunger for better yields, the party in the dollar sukuk market could be starting again.
Kicking things back to life was Khazanah Nasional Bhd, which made its inaugural appearance in the dollar sukuk market this week, with a US$750mil unrated sukuk issuance.
Reports say the five-year wakala notes were launched on Tuesday morning at 190 basis points (bps) over US Treasuries, which was later tightened to 178 bps to 180bps.
Capital is finding its way back to Malaysia, as recessionary pressures and low interest rates prevail in the United States. Economies like Japan and China continue to cut interest rates in their bid to resusitate their economy.
With US interest rates having stayed in negative territory for so long, and doubts on future rate hikes, investors are getting desperate for yields.
A case in point is the average yield for a 10-year dollar-denominated sukuk, which stands at 3.15%. This is some 140 basis points above the US Treasury rates. So capital is indeed definitely coming back to Malaysia’s bonds.
“There is definitely some interest in Malaysia now. Capital is coming back, but investors are getting more choosy and cautious. High quality issues from Malaysia is definitely in demand,” says Heddy Humaizi, who is sukuk analyst as well as director of Institutional Sales and Marketing for Saturna Sdn Bhd. Saturna is the Malaysian arm of US-based Saturna Capital.
Helping the Malaysian case would be US 10-year treasury yields, which are again below 2%, standing at 1.72% as of Thursday. It briefly hit 1.65% earlier in the day. (Bond yields have an inverse relationship to bond prices.)
“With yields being very low in the United States, it is definitely a good time for issuers to launch dollar debt issuances now,” says RHB Banking Group’s credit strategist for fixed income research Fakrizzaki Ghazali.
“The supply for dollar debt issuances in recent times have been very sluggish. When we compare the number of issuances in 2014 to 2015, there has also been a drop. So demand definitely exceeds supply,” says Fakrizzaki.
The existing dollar debt issuance (not taking into account Khazanah’s transaction) amounts only to US$3.5bil and makes up only some 2.47% when compared to the total Malaysian ringgit debt market which amounts to RM594.16bil.
Meanwhile, CIMB Investment Bank director of regional fixed-income research Nik Ahmad Mukharriz Nik Muhammad tells StarBizWeek that Malaysian bond yields have been higher than US treasury rates for some time now.
“Recently there was again talk that the Fed won’t be raising interest rates. So yes, Malaysia is more attractive now than it was a few weeks ago,” he says.
Corporates coming to debt market
Another big dollar issuance coming to the market will be Malaysia’s biggest electricity company Tenaga Nasional Bhd (TNB), which is likely to launch its first tranche of a US$1bil sukuk issuance soon, said sources.
Speculation was rife in early January that TNB was looking to tap the dollar debt market for the first time in two decades with its debut offering of global Islamic bonds.
TNB had asked bankers to submit pitches for a US$3bil sukuk programme, and proceeds will be used to fund overseas investments including the purchase of a 30% stake in Turkish power firm Gama Enerji A.S. for US$243mil.
The company last issued dollar-denominated debt in 1996, when it sold 100-year conventional notes.
In November, TNB’s subsidiary, Jimah East Power Sdn Bhd, sold the country’s third-biggest sukuk via an RM8.93bil offering. This was to part-finance the construction of a 2,000MW coal-fired power plant in Negri Sembilan, known as Project 3B.
“When it comes to sukuk, Malaysia has the ability to attract foreign investors. Malaysia and Saudi Arabia are the Top 2 in the world for Islamic finance, and we do have a 15 year head start over Saudi Arabia. There is some credibility here,” said Heddy.
He adds that the appetite and take up of the sukuk will ultimately depend on the company.
“Overall though, Malaysia is well known for high quality sukuk,” said Heddy.
“If the issuer of the dollar-denominated bond is a high-quality issuer like the Government or Petronas, the reception from international investors is typically very positive,” said a bond fund manager from a foreign insurance firm.
Earlier in the week, StarBiz reported that Malaysian Government-linked entities are poised to raise billions of ringgit via US-dollar bonds, as appetite for such papers has increased amid hunger for yields and a more bullish outlook on the Malaysian economy, bankers said.
Going by some estimates, there could be as much as US$20bil (RM84.22bil) being raised by Malaysian entities, including the Government, Khazanah, Petroliam Nasional Bhd, Axiata Group Bhd and Telekom Malaysia Bhd, to name a few.
A strong reason for more foreign confidence in Malaysia is also the stabilising economy.
On Tuesday, Fitch Ratings affirmed Malaysia’s long-term foreign- and local-currency issuer default ratings (IDRs) at A- and A respectively, with stable outlooks.
Malaysia’s senior unsecured local-currency bonds were also affirmed at A while the country ceiling was affirmed at A and the short-term foreign-currency IDR at F2.
Fitch said the key rating drivers included the Government’s commitment to fiscal consolidation, stability of the ringgit, and more robust reserve and economic growth.
It viewed the macroeconomic assumptions made in the budget as broadly realistic.
The three rating agencies – Moodys, S&P and Fitch Ratings – have given the same credit rating of between A3 and A- with stable outlooks for Malaysia.
Last week, Bank Negara announced that Malaysia’s economy grew by 4.5% in the final quarter of last year, which was better than expected. This brings the full-year gross domestic product growth to 5% from 6% in 2014.
The release of the better-than-expected gross domestic product numbers was positive for Malaysia. This is another factor which is now attracting capital back here,” says Nik.
He adds that the recent stability in the ringgit was also a positive factor for foreign investors, and this has taken away some of the foreign exchange risk of investing here.
The ringgit is the best-performing emerging-market Asian currency over the past three months, having been one of the worst performers last year. Year-to-date, the ringgit has gained 2.05% against the US dollar.
The economy is on a better footing now that the Government has revised its budget based on oil prices between US$30 and US$35, and the country is on track to achieve its targeted budget deficit of 3.1%.
“Over the last six months, how many countries actually recalibrated their budgets because of the falling oil prices? This was one of the main reasons why Fitch affirmed its rating on Malaysia,” said Heddy.
A stamp of approval by Fitch gives foreigners the assurance that the risk of a credit downgrade is minimised, and hence the ringgit ought to remain more stable.
Meanwhile, data from Bank Negara showed that Malaysia’s bond market registered net foreign inflows of RM1.7bil last month, compared with RM1.2bil in December 2015. This brings total foreign holdings of Malaysia’s total debt securities to RM216.5bil in January 2016, compared with RM214.8bil in the preceding month.
Inflows have been particularly strong in the Malaysian Government Securities (MGS) segment, with foreign ownership of MGS rising to RM164.4bil, or 47.9% of total MGS outstanding, as at end-January 2016, from RM162.1bil, or 47.7%, in December 2015.
Something for Tun Mahathir, TSMY, Dato Mukhriz, Dato Kadir Jasin and many others to admit being wrong!