The share of issuances of unrated corporate bonds as a percentage of total gross corporate bond issuances continues to rise. Should we be concerned?
In 2019, total gross corporate bond issuances came in strong in the first 11 months. Up 22.1% year-on-year to RM119.8 billion, it was the highest YTD issuance level ever, thanks to tightening credit spreads and a lower yield environment caused by easier monetary policy.
The unrated bond segment – which comprises quasi-government and unrated corporate bonds – led the rise. However, the continued increase in the issuances of unrated corporate bonds may not be conducive to the expected quality of the domestic corporate bond market. We are concerned that a sizeable portion of the unrated bond concentration risk is from the property sector.
The easing of mandatory rating requirements back in January 2015 is no doubt contributing to the rising share of issuances of unrated corporate bonds. Could the rise lead to a deterioration in general market transparency in the future?
If this is the case, then there will be implications not only for bond investors but also the broad financial and capital markets.
Given the current difficult economic and business environment, we see bond ratings gaining prominence, not least because it improves transparency but also because it gives market participants a baseline for assessing risk against a backdrop of rising uncertainties.
Ratings have other important benefits. At the level of the issuer, issuers of bonds with credit ratings can, for example, access a larger investor pool thanks to the publicity associated with published ratings. Additionally, bond credit ratings, especially those at the higher end, can help burnish an issuer’s credibility by inspiring not only the confidence of the investment community but also that of the business community at large.
From the investors’ perspective, rated bonds enjoy increased market liquidity because of the higher acceptance rate by large investors. This is not surprising because bond ratings help facilitate the portfolio management process as it allows for comparable assessments of creditworthiness. And as mentioned above, credit ratings – which are based on key non-publicly available information – improve transparency and assessment quality, further aiding investors’ investment evaluation process and portfolio allocation.
Given that uncertainty is the new normal, bond ratings will continue to have an important role to play in the capital market. We see their increasing relevance in efforts to improve capital market transparency and efficiency. In fact, the role bond ratings play in aiding domestic capital market development in the bigger scheme of things cannot be understated against the current volatile geo-economic and geopolitical backdrop.
We should thus be concerned that the percentage share of issuances of unrated corporate bonds continues to rise.
Contacts:
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my