Malaysia Funds Subway With First Exchange Bonds: Southeast Asia

Malaysia, Southeast Asia’s biggest local-currency bond market, will let retail investors fund Kuala Lumpur’s new subway as it starts marketing its first exchange-traded notes to individuals.

DanaInfra Nasional Bhd., the state-owned company that’s financing the rail network, is kicking off the offerings and plans to complete the sale of Islamic bonds by Feb. 8, according to a statement today. The notes will pay a minimum profit rate of 3.7 percent, depending on demand and market interest, it said.

The country joins Indonesia, Thailand and the Philippines in tapping the general public for funds and providing an alternative investment to bank deposits and equities. Prime Minister Najib Razak said in a speech at the unveiling at Bursa Malaysia Bhd. today that the securities give an “unprecedented opportunity” for people to invest in the nation’s development. The bonds will help boost market volumes, Tajuddin Atan, chief executive officer at the bourse, said in an e-mail on Jan. 6.

The Islamic notes will “provide retail investors with an opportunity to be part of a major public infrastructure project,” Ranjit Ajit Singh, chairman of Malaysia’s Securities Commission, said in an e-mail yesterday. “One of the key components of our capital-market strategy is to continue to grow the bond market, which is already the fourth largest in Asia.”

Malaysia sold a record amount of debt last year as companies help fund the government’s $444 billion development program to build railways, roads and power plants.

Institutional Investors

DanaInfra will offer 300 million ringgit ($99 million) of government-guaranteed Islamic securities to individuals, Ashraf Radzi, associate director of Prokhas Sdn., a financial adviser to the company, said in Jan. 3 interview. He declined to give specific details such as yields or maturity.

The bonds, which pay returns on assets to comply with the Koran’s ban on interest, will be sold in increments of 100 ringgit, or the equivalent of $33, with a minimum order value of 1,000 ringgit, Bursa Malaysia’s Tajuddin said.

The exchange-traded securities would open up the market to a bigger pool of funds given that it’s mainly dominated by institutional investors who currently buy or sell debt through brokerages or dealers.

Under present rules, an individual needs a capital base of more than 3 million ringgit, or gross annual income exceeding 300,000 ringgit in the preceding 12 months, to purchase bonds, Lee Kok Kwan, deputy CEO of CIMB Group Holdings Bhd., said in an interview yesterday. Alternatively, the minimum size per trade is 250,000 ringgit via private placement if net worth isn’t declared, he said.

Public Unfamiliarity

Malaysia’s one-year fixed deposits offer the public a 3.18 percent return, while three-year government bonds yield 3.04 percent, data compiled by Bloomberg and a central bank index show. The nation issued its first retail notes totaling 5 billion ringgit at a coupon rate of 5 percent in April 2009.

Thailand is selling three-year saving bonds to individuals at 3.75 percent, according to the Public Debt Management Office’s website. That’s more than the 2.93 percent yield on similar-maturity sovereign notes and the 2.6 percent for three-year fixed deposits. Indonesia sold three-year bonds to retail investors at a yield of 6.25 percent in October, while the Philippines issued 25-year securities at 6.125 percent.

“DanaInfra should offer at least a 20 basis point to 30 basis point premium over similar-maturity government notes to entice retail investors,” Choo Swee Kee, who oversees the equivalent of about $230 million as CEO at TA Investment Management Bhd., said in an interview in Kuala Lumpur yesterday. “Retail investors aren’t very familiar with bond trading and may not participate in the offering.”

Debt to GDP

Malaysia had $318 billion of debt outstanding as of Sept. 30, compared with $265 billion in Thailand and $237 billion in Singapore, according to data from the Asian Development Bank. The government’s development spending helped contribute to one of the highest levels of debt in Southeast Asia at 51.8 percent of gross domestic product. That compares with 24.1 percent in Indonesia, 50.9 percent in the Philippines and 44.9 percent in Thailand, according to data compiled by Bloomberg.

Malaysia sold 117.8 billion ringgit of debt last year as companies raised funds to help finance projects under the government’s economic transformation initiative, according to data compiled by Bloomberg. That’s almost double the previous record of 67 billion ringgit in 2011.

‘Great Start’

“The launch of exchange-traded bonds creates an affordable new investment opportunity for the masses,” Bursa Malaysia’s Tajuddin said. “The issuance also aims to provide product diversity to the market so that investors have an alternative, or an option to invest in a tradable investment that provides a steady stream of income.”

Bursa Malaysia is committed to ensuring the longer-term acceptance of exchange-traded bonds and will organize a series of talks and meetings with lead arrangers to help the public understand the benefits of the product, Tajuddin said. The bourse has also put in place various incentives such as lower trading fees and exemptions on stamp duty, he added.

“It’s a great start with a government-guaranteed issuance as this is the safest offering from a credit-risk perspective,” said Lee of CIMB Group, the nation’s top bond arranger. “Corporate bonds will eventually follow suit, which will be very important for retail investors as this will allow them to expand beyond equities, properties and bank deposits.”