KUALA LUMPUR: Risk appetite for single-rated bonds could return by the second quarter of 2010, should the improved global economy outlook continue, RAM Ratings Services Bhd officials said.

RAM deputy chief executive officer Chong Kwee Siong said while it was difficult to gauge investor sentiment in view of the uncertain market conditions, some investors were already looking at selectively investing in lower-grade debt papers that gave higher yields.

“There are still no concrete signs yet that the lower-grade debt papers are back in demand. Currently, investors are still selective and bond issuances are still predominantly consisting of higher-grade papers by financial institutions, utilities and infrastructure companies that have financial strength and stability.

“But, with the improved credit movement and falling credit spreads between the government debt papers and corporate bonds, the positive sentiment may trickle down to single-A rated papers as well,” he told The Edge Financial Daily in an interview last week.

RAM structured finance ratings head Siew Suet Ming said the credit window for lower-grade debt papers had narrowed significantly since 2007, as signs of a global economic credit crunch had emerged and had since deteriorated further.

However, she said in the past 10 years, the median for local company ratings had climbed to single-A from triple B ratings.

RAM had recently released its findings on ratings performance in the first half of 2009 that showed net rating activity had improved to -0.54% in the second quarter of 2009 from -1.54% in fourth quarter of 2008, while 90% of the ratings assigned was unchanged.

Siew said the ratings performance was underpinned by a stronger domestic banking sector that had shown credit quality and stability.

“We are cautiously optimistic of the domestic bond market outlook. The bond market had shown resilience towards the economic downturn.

“30% of the bonds in the domestic bond market are issued by strong and stable companies, especially those in the services industry, while companies that have exposures in project financing have ratings of at least AA2,” she said.

However, she said the pace of their recovery was still slower for some key sectors such as those that were export-oriented or related to property.

RAM said in the first six months of the year, two issuers had defaulted on RM274 million of rated debts, but the defaulters had already fallen to speculative grade a year before they had defaulted.

Of RAM-rated issuers, 16% are still on negative rating outlook or Rating Watch with a negative outlook. However, Siew said based on the default activity in the first six months of the year, the default was unlikely to hit its base-line forecast of 1.8% for 2009.

“Current data showed us that the annual default rate was only 1.08%, which was just slightly higher than 1.05% in 2008,” Siew said.

Chong added that given the more positive findings, RAM now believed that the domestic corporate debt market would reach between RM30 billion and RM35 billion of gross issuance.

Siew said gross issuance in the beginning of 2009 fell 3.7% year-on-year while net issuance fell by one-third, indicating that there were no new issuances by companies to roll over their financing.

However, Chong said by the first half of the year, there was RM28.5 billion net issuance, which was about RM1 billion to RM2 billion short of RAM’s forecast. “We also expect gross issuance for 2010 to hit beyond RM35 billion,” he said.  

Year-to-date, RM12.3 billion conventional bonds and RM13.4 billion Islamic bonds were issued, respectively.


This article appeared in The Edge Financial Daily, November 16, 2009.