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Malaysian unrated credit space needs greater transparency, liquidity, say investors
Two-thirds of investors are not and would not consider investing in non-rated ringgit bonds, according to Asset Benchmark Research
Monica Uttam 8 Feb 2018

INVESTORS remain sceptical of the Malaysian unrated credit space, citing transparency and secondary market liquidity, among others, as the key catalysts for developing the market, according to Asset Benchmark Research’s (ABR) Asian Local Currency Bond Benchmark Review 2017.

The removal of mandatory credit ratings for bonds in 2017 marked a milestone for Malaysian ringgit bond investors. Unlike in Singapore, where the Monetary of Authority of Singapore is trying to reduce the presence of unrated credit by offering a ratings grant to issuers, Malaysia is moving in the opposite direction, removing restrictions on unrated securities in a bid to deepen its corporate bond market.

The question is, however, are investors interested in buying non-rated corporate bonds anyway? When ABR asked investors just that, two-thirds said they are not and would not consider investing in non-rated ringgit credit.

ABR then asked investors what it would take to develop the unrated space. First, investors said improving the financial transparency and availability of issuers. In particular, portfolio managers are looking for regular issuer updates on financial results as well as corporate governance disclosures to enable them to make accurate credit assessments.

“Willingness to allow investors to look into all their financial projections, budget, etcetera, to give them comfort no matter how large their holdings are,” says one senior fund manager in Kuala Lumpur. One manager goes so far as to say that an unrated issuer should only be granted permission to issue if they are listed on the stock exchange.

Second, investors are also concerned with secondary market liquidity, and say that banks have a key role to play. “Banks need to increase liquidity and make markets,” says one PM at a large local shop.

A credit head is more specific on the required primary setup for unrated issuances: “At least three lead arrangers with track records of providing secondary market trading liquidity,” he says. “The lead arrangers are obliged to provide two-way prices for the bonds they arrange.”

Third, investors cited the quality of bank credit professionals as a catalyst for change. “I think banks also need to have a strong credit research team to advise the investors on the credit of the non-rated issuers,” says one. When starting out, investors argue that the companies targeting the non-rated space should be well-known or large cap issuers. “From there, the price discovery would be slowly developed,” a fund manager in the Kuala Lumpur explains.

And fourth, investors said that the liquidity of unrated bonds would increase significantly if there is further liberalization of regulatory requirements for banking and insurance institutions. For insurance firms, the regulatory limit for investing in unrated bonds is 5% of individual funds (above which the risk charge is extremely punitive), so investors say an increase on this would help. Others argue that having non-rated bonds be subject to the same regulatory risk charges as rated bonds could make a difference.

Methodology
The Asian Local Currency Bond Benchmark Review was conducted in the first quarter of 2017. Over 300 local currency bond investors including asset managers, hedge funds, private banks, insurance funds and commercial banks from 11 Asian markets namely China, CNH, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand took part.

Data sets include market penetration, market share/wallet share, buying criteria/client satisfaction, research content and the top individuals. To learn more about the Asian Local Currency Bond Benchmark Review please click here.

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