“I think just about every country that we’ve spoken to: the UK, the French not so much, but the Russians, Kazakhstan, Spain, Portugal, Germany, have all shown a lot of interest,” said one head of debt capital markets (DCM) for Malaysia at a leading international bank.
“We are talking to a few European companies about issuing in Malaysia. As credit spreads have widened in their home turf, you can get relatively competitive pricing after swaps,” said Augusto King, head of DCM Asia, at the Fund Forum in Hong Kong on Tuesday (April 24).
“We have certainly seen interest, we’ve been on a couple of road shows to test the waters and we’ve got some interest from issuers in some European countries and some companies from Russia. Financial institutions and some of the multi nationals are looking at it too,” said Ho Weng Yew, Malaysia head of coverage and origination at RBS, Malaysia.
Cross-currency basis swaps involve exchanging the money market floating rates of two different currencies. The key difference of cross-currency swaps with both regular currency swaps and regular interest rate swaps is that the former are always floating, and thus liable to change a lot.
The US dollar-Malaysian ringgit swap rate is currently minus 133 basis points (bp) for the five-year swap, which means that it’s up to 135bp cheaper to raise funds in ringgit debt than in equivalent US dollar bonds. This basis swap rate is at the widest it has been since August 2011.
While the cost saving is there, experts agree that European borrowers face such an onerous documentation process to raise ringgit-denominated bonds that they are balking at the prospect.
“We’d love to see some European issuers but the documentation requirements are such that they just don’t want to go through the additional time and effort and money,” said a head of local currency syndicate at an international bank.
According to King, if any European issuers were to issue in ringgit, they would be frequent issuers, who would only favour the ringgit rather than, for example the Thai baht or offshore renminbi, if the after-swap levels were particularly attractive.
Very few European companies have issued in ringgit in the past, and none since 2009, according to data provider Dealogic. The most recent European deal was from British supermarket chain Tesco, which issued a MYR19 million (US$6.22 million) 4.65% 3.5 year bond issue on December 16, 2009.
While Tesco is a European company the deal was done by its local subsidiary, Tesco Malaysia. The other two European companies to have issued ringgit debt are also well known to Malaysian investors: Lafarge Malayan Cement (France) and Nestle Foods, Malaysia.
“Tesco is a bit different; it’s the local company that issued in Malaysia. It’s a different game altogether,” said the head of DCM.
Obstacles to issuance
According to experts, several things prevent European issuers coming to market.
Firstly, local investors understand that their market presents a funding arbitrage opportunity for foreign borrowers, so they tend to raise their pricing demands if they see many issuers coming to market.
Secondly, competitive pricing is only really available for the lower-rated European names, while Malaysian investors tend to be wary of unknown names and focus on strong ratings.
“Whether the pricing is competitive or not completely depends on the rating. If it’s a ‘AA’ corporation I think it would be unlikely be more competitive [in the ringgit market] but I think if it’s in the ‘BBB’ region or single ‘A’ there are potentially cost savings. But local investors would be smart enough to price up,” said a DCM banker at a Malaysian bank.
“If you have really good names coming to the local market then investors may be open to it, but there’s a price differential in terms of rating, and the problem is that investors will be very credit centric,” added the head of local currency syndicate.
Additionally, Malaysian regulators prefer international borrowers to adhere to Islamic guidelines when issuing their bonds.
“In developing Malaysia as a hub for Islamic finance, they would have a preference for the sukuk structure,” said King. “As for some frequent issuers, they may find it less appealing to create a sukuk structure just for one currency,” he continued.
Despite this there the appealing funding arbitrage offered by Malaysian ringgit versus several currencies has led to growing global interest.
The total value of gross issuance as of end-March this year was MYR38.97 billion, more than three times that of the first quarter of 2011. Malaysian companies issued much of the debt, but companies from South Korea, India and Kuwait were also issuers of ringgit bonds.
Foreigners held 39% of bonds in Malaysia (March 2012) up from 10.1% in March 2009.