Nonfinancial Corporate Sector Debt17
A. Background and Introduction
27. This selected issues paper assesses the nonfinancial corporate sector in Malaysia, and finds that nonfinancial corporate sector risks remain manageable, with relatively stable leverage overall. Malaysian nonfinancial corporates rely mainly on bank loans for financing (about 60 percent of their total liabilities), however, the Malaysian corporate bond market has grown rapidly and is a key source of financing. The majority of corporate bonds issued are denominated in ringgit with a maturity above five years, reducing both currency-mismatch and refinancing risk. Moreover, as the leading issuer of sukuk, Malaysia is at the forefront of Islamic finance. However, vulnerabilities may be growing, including in some government-linked companies (GLCs) where debt levels are rising faster than profitability.
B. The Corporate Sector Bond Market
28. Malaysia’s corporate bond market is deep, well developed and comparable to those of many advanced economies, in terms of its market size in percent of GDP and the range of instruments available. At end-June 2013, corporate, domestic and international, debt securities outstanding amounted to 71 percent of GDP (based on BIS data)—one of the largest in Asia as a percentage of GDP. Non-financial corporate sector debt securities outstanding were 42 percent of GDP and largely in the domestic market—bonds issued by nonfinancial firms in the international market has been less than 6 percent of GDP since 2005 and was only about 1 percent of GDP as of June 2013. The market is one of the least concentrated in Asia, with the 20 largest issuers accounting for about 65 percent of the issuance in 2012, compared with 77 percent in Thailand or 74 percent in Singapore. Bond financing is now widely used by a wide variety of sectors, although the financial sector remains the main issuer of conventional bonds, with a share of close to 40 percent of bonds issued between 2008 and 2013.18
Corporate Debt Securities in Selected Asian Economies
Source: Bank for International Settlements; staff calculations.
Nonfinancial Corporate Sector Domestic and International Debt Securities
Sources: Bank for International Settlements; Staff calculations.
29. The Malaysian government has made significant progress in developing the local currency corporate bond market. Since the 1997 Asian financial crisis (AFC), there has been an effort to move away from over-reliance on bank loans, create alternative sources of funds for the nonfinancial corporate sector, while reducing dependence on volatile foreign capital inflows. The government established the National Bond Market Committee (NBMC) in 1999 to devise a high-level strategic direction for the local bond market development, and appointed the Securities Commission (SC) in 2000 to be the single regulator for the corporate bond market in an effort to refine and streamline bond issuance processes. In addition, among other measures, there were initiatives to establish a reliable and efficient benchmark yield curve, widen issuer and investor base, and improve liquidity in the secondary market. Local rating agencies have also been established and play a key role in the development of the local ringgit denominated bond market.
30. Malaysia is at the forefront of Islamic finance and is the leading sukuk issuer. As of end-June 2013, global outstanding sukuk amounted to US$245.3 billion, of which Malaysia’s share was US$148.2 billion, or 60.4% of the total19. A key measure undertaken by the Malaysian government to develop the sukuk market was to launch the Malaysia International Islamic Financial Center (MIFC) in 2006, in order to develop Malaysia into an international Islamic finance hub. Another important step was liberalizing regulations to allow foreigners to issue Islamic bonds in the Malaysian capital market. In July 2013, the inaugural issuance of the Government Investment Issues (GIIs) under the Murabahah structure marked a significant milestone in Malaysia’s sukuk market development, and the RM4 billion GIIs were oversubscribed by 2.9 times.
Malaysia Nonfinancial Corporate Bond Issuance by Currency
Source: Dialogic; Staff Calculations.
31. Bond issuance of nonfinancial firms in the last seven years has very much followed the trend of recent economic cycles and global liquidity conditions. Issuance fell to US$5.3 billion (2.3 percent of GDP) in 2008 amid the Global Financial Crisis (GFC), but surged back to US$23.2 billion (8.0 percent of GDP) in 2011, as the low domestic and global interest rate environment provided favorable conditions for bond financing. Bond issuance scaled back somewhat to US$18.7 billion (6.0 percent of GDP) in 2013, as investors retreated from emerging markets when anticipation of the US Fed tapering dampened capital markets sentiment.
32. Foreign exchange risks are limited as Malaysia’s nonfinancial corporate bonds are mostly issued in ringgit and in the domestic market, generally over 80 percent since 1997 and about 95 percent between 2010 and 2013.20 The high share of domestic-currency denominated bonds reduces the risk of widespread sharp increases in the debt service burden stemming from ringgit depreciation, although firms with higher foreign currency debt exposure could still be affected by it.
Malaysia Carpo rates International Debt Securities by Currency
Source: Bankfor International Settlements; staff calculations
33. In terms of currency denomination, more than 80 percent of the international bonds outstanding are denominated in U.S. dollars in every quarter since 2005. Before the GFC, most of the international bonds were issued in either U.S. dollars, Euros or Japanese yen; but after the GFC, while the U.S. dollar remains the preferred choice, more of the international bonds have been issued in Singapore dollars with little issuance in either euro or yen. Total foreign-ownership of private sector debt securities is small, at less than 1.5 percent of GDP.
34. With nonfinancial corporate bonds typically issued at long tenors, refinancing risk is reduced. Since 2005, the original and remaining maturities of Malaysian bonds in any one year have averaged nine and five years, respectively, while the percentage of Malaysia’s international bonds maturing within one year have averaged about 10 percent. As of June 2013, Malaysia’s international bonds (issued by both financial and nonfinancial companies) maturing within one year amounted to US$3.9 billion, about 11 percent of the total and about 1.3 percent of GDP. In terms of bond maturity, the share of nonfinancial corporate bonds issued with maturity of 5 years or more was about 80 percent in 2011 and 2012, but dipped to 63 percent in 2013, as the yield curve steepened. With the majority of bonds issued in recent years having medium to long term maturities, issuers’ interest rate and refinancing risks appear manageable.
International Debt Securities Maturing Within One Year
Source: Bank for International Settlements; staff calculations
Malaysian Nonfinancial Corporate Bond Issuance by Maturity
Source: Dealogic; staff calculations
C. Nonfinancial Corporate Leverage and Profitability
35. Corporate profitability improved during 2010-2012 and Malaysian firms do not appear to be excessively leveraged. The improvement in nonfinancial corporate profitability reflected a significant economic rebound after the global financial crisis (GFC), primarily driven by strong domestic consumption and investment. 21 The median debt-equity ratio of publicly listed nonfinancial firms in Malaysia has stayed relatively stable over the past decade, hovering between 24 and 32 percent 22. Close to 70 percent of companies have debt-equity ratios below 50 percent at the end of 2012. The ratio of net debt to earnings, measured as earnings before interest, taxes, depreciation and amortization (EBITDA), declined from 2005 to 2010, but has since increased. 23
36. Government Linked Companies (GLCs) tend to be more highly leveraged than non-GLCs, and their debt levels seem to be increasing faster. GLCs usually carry some public policy initiatives in addition to their commercial objectives. They currently account for about one third of the overall market capitalization of Malaysia’s stock exchange which implies that the impact of their performance on the financial market is not insignificant. The debt-equity ratios for GLCs have been drifting upwards since 2008, though current levels remain lower than those observed before 2006. GLCs also have higher debt relative to earnings, with a larger increase in the Net Debt/EBITDA ratio for the GLCs than the non-GLCs since 2009, suggesting that their debt level may be increasing faster than profitability.
Debt/Equity Ratio of Malaysia Corporates (Median)
Source: Bloomberg; staff calculations.
Net Debt/EBITDA Ratio of Malaysia Corporates (Median)
Source: Bloomberg; staff calculations.
37. Malaysia’s corporate bond market has grown rapidly since the AFC and is now one of the largest in Asia in terms of GDP. Malaysia is also a global leader in the issuance of sukuks. Overall, the assessment of Malaysia’s nonfinancial corporate bond market profile from its leverage, profitability, issuance characteristics and stock composition suggests limited vulnerability on average, with no immediate threats in the nonfinancial corporate sector’s bond market. However, pressure points may be building up among some GLCs. With most of the nonfinancial corporate bonds being issued in ringgit and having maturities above five years, firms’ exposure to exchange rate risk is small and the vulnerability to short term interest rate hikes is also limited.
Prepared by Seen Meng Chew (Singapore Resident Representative Office).
Estimated using bond issuance data from Dealogic.
Data from “Global Sukuk Market: Quarterly Bulletin, August 2013”, published by Rasameel Structured Finance Company.
The exception is 2009, when close to half of the bonds were issued in U.S. dollars, as Petronas launched a US$4.5 billion bond issuance through a combination of conventional bonds and sukuk in August 2009—one of the largest Asian bond issuance during 2009. Appropriate market conditions, liquidity and the national oil company’s need for additional cash prompted it to tap the international bond market in that year.
The analysis in this section is based on sample of all 932 publicly listed companies in Malaysia, using data from Bloomberg.
We use median instead of mean as the measure of central tendency as the median is less sensitive to negative values than using the mean, however, the median does not fully depict situations where there are long tails in the distribution.
Net debt here refers to total debt less cash, marketable securities, and liquid collaterals.