Posted Date : 22 Mar 2011
Malaysian Rating Corporation Bhd (MARC) held its 2011 Investor Briefing in Kuala Lumpur today. MARC's Chief Executive Officer, Mohd Razlan Mohamed, opened the briefing with welcoming remarks, describing the annual event as a platform and forum for MARC to share its views on the economy, bond market and the credit outlook for selected industry sectors.
He touched on MARC's continuing commitment to create and disseminate valued knowledge to its stakeholders, particularly investors. This commitment is embodied in MARC's new vision of becoming a "Provider of Trusted Insights on Risk." The briefing, attended by over 100 participants from the banking and investor communities, covered a broad range of topics, on which a brief summary of the salient points is given below:
The Malaysian Economy
The presentation on the 2011 economic outlook provided assurance of sustained growth for the Malaysian economy amid headwinds. MARC noted the moderation in the growth momentum of the economy following its sharp recovery in 2010. The slower growth is expected to result from weaker external trade in line with softening global demand. The key issues affecting domestic economic growth in 2011 were identified as: rising food and pump prices and their effect on consumer spending, possible monetary tightening in response to emerging demand-pull factors, the risk of a possible sudden reversal in capital flows, and the effect of surging oil prices on budgetary performance.
On the external front, MARC said that the outlook for the US economy had improved more recently, as evidenced by a decline in its unemployment rate. Economic growth in Europe was expected to remain subdued in contrast to Asian economies which would continue to benefit from China and India's strong growth.
The Malaysian Bond Market
Lower corporate default rates and declining corporate downgrade-to-upgrade ratios were witnessed in 2010 due to an improved operating environment brought by a pickup in the economic activity. MARC anticipates a lower expected default rate and improved corporate credit quality in 2011 on the assumption that economic conditions will remain supportive of consumer and business confidence. In light of MARC's expectations for sustained economic growth momentum through 2011, and the government’s announcement of the Public-Private Partnerships (PPP) programme involving RM14.5 billion worth of projects to be implemented this year, the rating agency projects corporate bond issuances to reach the RM50 billion mark (2010: RM48 billion).
MARC’s views on several key industries within its rating universe can be summarized as follows:
The year 2010 saw an increase in average crude palm oil (CPO) prices and stronger overall financial performances. MARC expects the earnings performance of oil palm producers to moderate from 2010 levels but still remain strong. The rating agency believed that CPO price would likely be maintained within the range of RM2,800/MT to RM3,000/MT in 2011.
On a separate note, MARC said that the palm oil sector’s inclusion as a National Key Economic Area (NKEA) under the government’s Economic Transformation Programme (ETP) could spur increased productivity and investments in the downstream sector.
MARC projects a stable credit outlook for the plantation sector, mostly on account of the generally favourable prospects for earnings and cash flow generation for the next several quarters.
MARC said, notwithstanding generally supportive government policy, the slower launches in the third and fourth quarter in 2010 could signal weakening buying sentiment among property purchasers. The rating agency noted incentives given to first-time buyers and low-income workers and the increase in maximum loan eligibility for government servants. Affordability of mortgage financing schemes which had been a factor in the strong performance of the residential sector would be affected by monetary policy tightening. MARC expects the performance of the residential sector to moderate in 2011.
The rating agency saw a challenging outlook for the office and retail sectors with incoming supply expected to exceed demand. This is expected to exert downward pressure on occupancy rate and rental yields. The performance of the retail segment is affected by general economic conditions, tourist arrivals and consumer sentiments, amongst others.
The construction sector weakened in the second and third quarter of 2010 before recovering in the fourth quarter. The outlook for the construction sector remains closely tied to government infrastructure spending.
The large-scale infrastructure projects announced by the 10th Malaysia Plan and the Economic Transformation (ETP) programme are expected to set the stage for a rebound in the construction sector. MARC notes that the implementation timeline of these projects and the ability of construction players to pass on rising costs remain key drivers of the sector's performance over the near-to-intermediate term.
MARC sees several challenges ahead for the domestic banking sector: an increasingly saturated domestic market and intensifying competition, escalating household sector debt and lingering uncertainties with respect to the performance of the domestic corporate sector.
Overall, MARC maintains a stable outlook for the Malaysian banking sector. Malaysian banks have been observed to have performed well during the crisis and the recovery phase. The rating stability of the Malaysian banking sector continues to be underpinned by adequate capitalisation, good asset quality and decent earning streams.
Oil & Gas
MARC sees recovering oil demand but believes that oil prices are unlikely to hit their pre-crisis peak in 2008. Despite the recent price spike triggered by 'regime-toppling' protests, MARC believes a major supply disruption to be unlikely at this point in time. Against this backdrop, MARC expects oil majors to continue investing upstream to maintain production.
MARC's SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of oil and gas service providers highlights a number of challenges and opportunities. Challenges include excess capacity in certain segments, slow order book replenishment and weak credit metrics. Most of the players in MARC's rating universe are dependent on Petronas' exploration and development (E&P) spending and supportive government policy. In this context, MARC believes that key entry point oil and gas-related projects announced by the government under the ETP will provide positive impetus for the sector.
There is still some lingering downward rating pressure for some issuers in MARC's rating universe despite the generally improving industry outlook.
Infrastructure Financing and Structured Finance
MARC observes resilient traffic growth in 2010 despite the increase in the retail fuel price. Given the fact that toll rates on ten toll road concessions were not reviewed in 2010, there is a lack of clarity over the status of the reviews and the eventual mode of compensation to the affected operators. However, MARC noted meaningful refinancing activity in 2010 with regards to this sector and this is likely to continue going forward barring any adverse development.
MARC sees a stable credit outlook for the power sector underpinned by the rebound in electricity demand in 2010 which is expected to be sustained through 2011. However, the uptrend in fuel prices poses a challenge to the earnings performance of the national electricity utility company, TNB. At the same time, there is increased urgency to increase the country’s generation capacity in anticipation of higher demand. Hence, this has set the stage for TNB to execute new PPAs with existing and new IPP operators, which would incorporate more equitable demand-risk sharing. Nevertheless, MARC expects this sector to sustain their very strong credit profile.
The on-going restructuring of the water industry has created high anxiety for investors and issuers, especially with respect to the Selangor water sector. This has resulted in the downgrades of the Selangor water-related bonds in 2010. In absence of resolution by second half of 2011, the rating agency expects a rating cliff situation to occur in respect of the affected bonds. MARC however is still maintaining investment grade ratings on the majority of Selangor water-related bonds on expectation that the Federal government will intervene to prevent defaults.
On the structured financing front, MARC noted that the real estate and plantation based asset-backed financings have performed satisfactorily. However, the structured transaction such as collateralized loan obligation asset class has not performed well due to the decline in the underlying credit quality of the corporate borrowers and zero recovery of the defaulted loans prior to maturity.
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