THE debt market has seen a marked slowdown in issuances this year amid subdued economic activity, financial market conditions and risk-averse investors.

Industry players stress that the slowdown is not so much because of the absence of potential issuers, but rather that investors have been a lot more cautious given the global economic downturn.

Investors continue to play safe, principally keeping to “safe havens” such as Government bonds and highly rated corporate bonds and sukuk.

“How can corporates turn to debt papers if there are no takers or only takers for highly rated bonds? Moreover, bank loans are getting more attractive for credit excellent companies which require shorter term financing as the interest rate has dropped,” says an industry player. In addition to investors’ interest, the risk premium on corporate bonds also remains elevated.

RAM Ratings Services Bhd chief executive officer Liza Mohd Noor says: “There is currently a pricing gap between the rates that borrowers are willing to pay and the yields investors are demanding.

“Unless and until market confidence is re-established, credit conditions improved, and the pricing gap narrows to tolerable levels, we expect issuance of bonds to continue to be deferred.”

Apart from corporates postponing or putting off bond issuances, RAM notes many companies have also turned to the banking market for new funds or refinancing.

Liza points out that bank loans are relatively simpler in procedures and take a shorter time to achieve financial close compared with tapping funds from the public via the bond or equity markets. Domestic bank financing has always been the dominant source of funds for the corporate sector. An example is timber company Priceworth Wood Products Bhd which recently cancelled its RM160mil commercial papers/medium term notes for a term loan to refinance its debt.

It was reported that the bonds were cancelled as the company had secured a term loan – a cheaper mode due to the downtrend revision of base lending rate.

Malaysian Rating Corp Bhd chief executive officer Mohd Razlan Mohamed points out that issuers are likely to scale down or put their expansion plan on hold in anticipation of further stress in the global economies.

He adds that the accessibility to the corporate bond market in the present scenario is available mainly for AA- and AAA-rated papers.

“The question is whether there is any necessity for companies to issue bonds or raise capital at the moment?

“I do not foresee any big ticket infrastructure type of projects that will support any big issuances of bonds at a higher rating of AA and above this year,” he says.

According to statistics from Bond Pricing Agency Malaysia Sdn Bhd corporate issuances (based on issued amount for corporate, long and short term) have dropped to RM82.8bil last year versus RM105.4bil in 2007.

For the first three and the half months of 2009, only RM18bil went to market. Assuming the figure is annualised, a possible total issuance of RM61.56bil this year is still a decline from 2008.

“Still, if the experience of the 1997-1998 crisis is anything to go by, there is always the inherent risk of putting all your eggs in one basket.

“It is therefore only natural and prudent for corporates to want to maintain some diversification in their funding options; and the bond market offers such an alternative – where they are able to tap the capital market directly especially during times when banks curtail their lending or syndication activities to protect their balance sheets, and the equity market is lifeless,” Liza says.

A recent successful issuance is Putrajaya Holdings Sdn Bhd’s RM300mil Musyarakah medium term notes with tenures ranging from three to 10 years. The papers are AAA-rated.

Hence, while RAM is expecting the volume of corporate bonds/sukuk to drop to between RM20bil to RM25bil, it remains positive on the prospects of the local market and the continued significance of bonds/sukuk as a funding tool.

MARC, meanwhile, is estimating private debt securities issuance in the range of RM25bil to RM30bil with a downside bias.

Mohd Razlan says the agency has about RM2bil to RM3bil bond programmes it is rating now.

“However, we do not know if they will translate into actual issues,” he says, adding that two years ago MARC will have rated and issued some RM20bil by the first quarter of the year.

Kenanga Investment Bank Bhd has three or four issuances in the pipeline so far this year with A to AAA rating. To acting chief executive officer Lee Kok Khee, the bond market is still a viable option for corporates especially those with clear cash flows, are reputable and seek to raise longer term funds.

“I expect companies will continue to turn to debt papers for their fund raising requirements given the low interest rate environment and tight credit environment.

“For issues to be successfully placed in the market the structuring and bond covenants will have to be tight and well thought out to convince investors in uncertain market conditions,” he adds.