Price disparity for DanaInfra

Malay Mail, 25 February 2013

Time needed for investors to be comfortable with new unfamiliar asset class

THE country’s first retail bonds is trading at a price difference of between 8 to 14 basis points over its non-listed counterpart, the over-the-counter (OTC) market.

DanaInfra Nasional Bhd made history when it slated RM300 million of its RM1.5 billion sukuk issuance to the retail market, that saw the RM300 million sukuk being the first retail bonds for Malaysia that made its debut on Feb 8.

The retail bond has been trading at a premium since it made its debut albeit its price has gradually been declining ever since from first trading day closing of RM101.31 on Feb 8 to RM100.45 closing price on Feb 21.

Fixed income market observers said the price variation could likely be due to the yield difference between the 10-year retail bond and its OTC counterpart when the debt papers were issued.

As both the OTC and retail bonds have a 10-year tenure and were issued by DanaInfra, thus bearing the same counterparty risk, the price disparity is likely to narrow in the coming days.

However, other industry participants said the two markets would likely continue to see a price disparity albeit at a smaller rate due to different transaction cost, investors’ strategy and expectations.

As for arbitrage opportunism from the difference in price in these two markets, the window of opportunity would soon close if investors were to take advantage, causing the price difference to narrow, which would most likely benefit retail investors.

However, due to the varying trading factors between the two markets such as transaction cost and lot size, the chances of arbitrage is likely low.

On the lackluster performance of the retail bond that has seen declined prices since its debut, analysts said it could be due lack of demand as retail investors remain skeptical and unfamiliar with this new asset class.

“When you are looking at retail bonds, you will not be looking at business risk. It will be on credit risk as opposed to stocks that have business operations. Hence, naturally the investment strategy will be different as well as expectation,” an industry participant said.

Overall, industry observers said the retail bond was likely to continue to see low trades with prices depressed in the coming months.

This, they said, was expected as it’s a new unfamiliar asset class, where time is needed for investors to be comfortable and savvy with the retail bonds.

However, they said the lackluster performance would likely put a dent for other issues of retail bonds in the near to medium term, but hoped that in the longer term as investors get more acquainted with such asset class, other issues of retail bonds would be more acceptable.

Notably however, the total trading volume since issuance accounts for only a small percentage of the total retail bonds issued of RM300 million.

This shows that most retail investors are still holding on to their sukuk in order to enjoy the high profit rate offered of 4% amidst the currently low interest rate environment whereas those who sold their sukuk are short term investors (IPO applicants) whose initial intention is to enjoy the price appreciation, where the market price is higher than the par value of RM100 per unit.

Web Source: http://www.mmail.com.my/story/price-disparity-danainfra-48819