Negative corporate rating actions still high in 1H18, but abating

KOTA KINABALU: In spite of the high number of negative corporate rating actions seen in the first half of 2018 (1H18), RAM Ratings Services Bhd (RAM) pegged an overall healthy outlook for the domestic corporate bond market.

This was also despite much economic volatility and uncertainties following a historic change of government in Malaysia.

In a statement, RAM saw that corporate bonds and sukuk issued in 1H18 amounted to RM55.7 billion, which was slightly higher than the RM54.8 billion seen in 1H17.

“Out of this, 56 per cent comprised rated bonds, with 85 per cent y value or 104 issues carrying RAM-assigned ratings,” it said in a statement. “The bulk of the RAM-rated bonds originated from financial institutions (48 per cent) and the infrastructure and utilities sector (17 per cent).

“In the period under review, the rated credits in RAM’s portfolio stayed healthy; 81 per cent issues retained AA or higher ratings while 90 per cent had a stable outlook.”

Of the remaining 10 per cent portfolio that experienced a change in rating – both published and unpublished – RAM saw that seven issuers were downgraded in 1H18 while none was upgraded.

This led the net rating action (or rating drift) to remain negative as at end-June 2018.

“There are however, signs of a possible upward momentum in the coming quarters, as indicated by the decline in issuers placed on negative outlook and the concurrent increase in those put on positive outlook in 1H18,” it explained, adding that a change in rating outlook typically – although not always – precedes a rating change in the next 12 to 18 months.

“As at end-June 2018, the ratings of seven issuers carried a positive outlook, which was up from four as at end-December 2017, in contrast to 11 with a negative outlook and on rating watch.

“Although the trajectory may be improving, the overall rating drift is likely to remain negative by end-2018, as the number of downgrades would likely exceed upgrades.”

Going forward, RAM remained optimistic about Malaysia’s economic resilience, although downside risks could moderate growth and the expansion of the domestic bond market.

In particular, fund-raising activity by quasi-government entities may be contained by the Government’s review of large infrastructure projects and contingent liabilities.

“External risks stemming from further rate hikes by the US Federal Reserve, mounting trade tensions and risk aversion to emerging markets could drive yields further up,” it highlighted.

“That said, we expect bond issuance to be sustained at RM90 billion to RM100 billion in 2018, underscored by capital augmentation by financial institutions and private-sector infrastructure expenditure – the two anchors of ringgit bonds and sukuk in Malaysia.

“Meanwhile, MGS/GII issuance is likely to remain at our earlier forecast of RM100 billion to RM110 billion for the year.”