The fallout from a global slump in oil prices roiled Malaysia's local capital markets last week, as a spike in government yields forced issuers to rethink plans to sell ringgit bonds.
Yields on 10-year government bond jumped to 4.18% as of last Thursday, up 25bp in the space of a week amid continued selling pressure on the ringgit.
The 10-year benchmark has soared 40bp from a 2014 low of 3.78% on October 17, while the ringgit has slumped 6.7% against the US dollar in the same period.
Budget carrier AirAsia had hoped to make a debut in the local debt markets this month with an unrated perpetual note, but it looks unlikely to do so after the spike in rates prompted investors to demand far-higher yields.
"The high rates are going to slow down the pipeline for December, which means issuers that can afford to wait until next year will do so," said a Malaysian debt banker.
Slumping oil prices and a strengthening US economy sent the ringgit to a five-year low of M$3.508 against the dollar on December 8. While other emerging-market currencies have suffered, Malaysia has been particularly hard hit on investor worries about the oil-exporting country's dependence on energy revenues.
Maybank fixed-income analysts Winson Phoon and Se Tho Mun Yi estimated some M$20bn-$25bn (US$5.7bn-$7.1bn) of foreign holdings had been pulled from the domestic bond market since November, particularly in short-term securities of less than one-year maturities.
Foreign investors had poured a net M$17.7bn into ringgit bonds this year to the end of October, and the sudden reversal of appetite explains much of the volatility. Around 40% of all Malaysian bonds are in foreign hands.
Local banks have also pushed up saving rates as they look to boost deposits before the end of the year, handing potential issuers a double whammy.
"Just look at the short-end of the rates - the banks are paying anywhere between 4.00% and 4.20% for one-month to six-month deposits," said the banker. "However, in the bond markets, Triple A rated names are paying around 4.15%-4.25% for five-year money. It's quite tough to interest investors now."
Pressing ahead
While AirAsia stands to benefit from lower oil prices, it will need to balance any advantage against higher funding costs.
Falling crude oil prices are seen to have an adverse impact on revenues of state-owned Petronas, which contributes heavily to the government's coffers. Oil-related industries are estimated to account for about one-third of state revenues.
Petronas said on December 1 that low oil prices were forcing a 15%-20% scale-back in capital expenditure for next year. Dividends to the government could go down as much as 37% if oil prices remained low, it said. The news sent oil-related stocks down, leading to a drop of around 2.3% in the KLCI the following day.
The reduced dividends from Petronas will make it harder for the government to narrow its budget deficit, a key consideration in its international sovereign ratings.
Other issuers, however, are pressing ahead at higher yields. DRB Hicom, a cars-to-property conglomerate, is selling two tranches of perpetual notes with call options in years five and seven. The perp non-call five is being shown at an initial yield guidance of 7.2%-7.5% and the perp non-call seven is at 7.7%-7.8%, far higher than the 5.25% yield Malaysia Airports Holdings paid on its M$1bn perp non-call 10 two weeks ago. The notes of MAHB have an AA2 rating from Ram, while those of DRB have an A from Marc, which explains the higher yield guidance.
Names such as Perbadanan Tabung Pendidikan Tinggi Nasional and Suria KLCC had to wait until last week for markets to settle before pricing their separate deals. PTPTN paid a yield of 4.88% for 20-year funds, higher than the 4.79% DanaInfra paid for its 20-year money at end-November.
"It has been harder for investment-grade names, but the debt markets have adjusted somewhat now, compared with two weeks ago," said a debt syndicate head. "As long as the issuers price sensibly, they should have little problem selling their deals.
