Malaysia launches first exchange traded bonds

The Edge - 9 January 2013

KUALA LUMPUR: DanaInfra Nasional Bhd, the government’s fundraising arm for the Klang Valley mass rapid transit project, will pioneer the country’s first listed fixed income assets for retail investors with RM300 million in retail sukuk or Islamic bonds.

DanaInfra’s exchange traded bonds and sukuk (ETBS) will also be the first sukuk in the world to be traded on an exchange.

“The bonds launched today (yesterday) represent an unprecedented opportunity for the people of Malaysia to invest in and profit from the nation’s development,” Prime Minister Datuk Seri Najib Razak said at the launch of the ETBS yesterday.

DanaInfra will issue the RM300 million retail sukuk next month as part of its RM1.5 billion 10-year sukuk exercise.

The minimum subscription for the ETBS will be RM1,000, making it more easily affordable to retail investors than the current minimum RM5 million offered over the counter (OTC) to institutions.

The ETBS will give retail investors an avenue to add more diversification to their portfolios.

The bonds and sukuk are tax exempt for capital gains and coupon payments.

DanaInfra’s sukuk is still in the process of book building with institutional investors, but an indicative coupon rate of at least 3.7% was revealed at the press conference.

According to DanaInfra chief operating officer Datuk Kamal Mohd Ali, the group’s current average cost of borrowing is around 3.7%.

“We think a yield of 3.7% is fair and we are neutral on the bonds. Individual investors will have to decide for themselves based on their investment appetite if an annual return of 3.7% over 10 years is attractive,” said Malaysian Rating Corp Bhd chief executive Mohd Razlan Mohamed.

In comparison, 10-year Malaysian Government Securities (MGS), which are virtually risk-free, command a yield of 3.52%, according to Bond Pricing Agency Malaysia (BPAM) data.

Quasi-government bonds issued by Cagamas Bhd and Khazanah Nasional Bhd have yields of 3.97% and 3.78% respectively for 10-year maturities.

Like MGS, DanaInfra’s bonds are virtually free of credit risk as they are guaranteed by the government and insured under Perbadanan Insurans Deposit Malaysia. However, their value can still be affected by changes in the market such as rising interest rates. Low trading liquidity of the bonds could also be another issue.

The four joint lead banks arranging the issuance will have a commitment to buy and sell the bonds and ensure sufficient liquidity, said CIMB Investment Bank Bhd deputy group CEO Datuk Lee Kok Kwan.

They are CIMB Investment Bank, AmInvestment Bank Bhd, Maybank Investment Bank Bhd and RHB Investment Bank Bhd.

The bonds will be fully fungible between the institutional and retail tranches to facilitate liquidity.

“Right now, issuers enjoy ample liquidity in the bond market from institutions. There is a lot of money in the system and most corporate and government bonds have little trouble in finding buyers,” said Razlan.

Going forward, more issuances will sustain the ETBS market.

“We have a huge pipeline of bonds to be issued this year. The only question is how much will be carved out for institutional investors,” said Lee.

DanaInfra has an estimated RM8 billion in sukuk to be issued this year, including the RM1.5 million sukuk planned for Feb 8.

“We have to issue bonds every quarter to meet MRT Corp’s [Mass Rapid Transit Corp Sdn Bhd] funding needs. Therefore, how much funds are needed will depend on MRT Corp’s requirements at the time, and we estimate we will need to raise RM8 billion this year,” said Kamal.

While government-backed bonds may pave the way for exchange traded fixed income assets, investors will be more keen on relatively riskier bonds that pay better returns.

“Slightly riskier bonds with higher returns would definitely catch investor interest. It will allow investors to buy into companies they are familiar with, without being exposed to the riskiness of the equity markets,” said Lee.

Non-government backed bonds with the highest AAA rating command a yield of about 4.26% for maturities of 10 years, according to the BPAM.

(Web Source: http://www.theedgemalaysia.com/highlights/228895-malaysia-launches-first-exchange-traded-bonds.html)