Author Topic: Increased reliance on bond markets for financing  (Read 1505 times)

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Increased reliance on bond markets for financing
« on: October 26, 2012, 09:25:55 PM »
KUALA LUMPUR: Corporations have increased their issuance of debt papers of late with reasons for doing so varying from refinancing existing bonds to raising capital for future expansion.

Whether this increase may shave earnings will largely depend on the terms of this type of financing but analysts don't think profitability will be affected.

Some companies may have decided to resort to issuing new debt because costs of bond financing may be lower today compared with previous times on the backdrop of the sustained low interest rate environment around the world.

This trend is also noticed in bigger companies such as Maxis Bhd which had announced their RM2.45bil Islamic Medium Term Notes Programme and IOI Corp Bhd announcing their Euro Medium Term Note Programme with an initial size of RM4.7bil (US$1.5bil).

RAM Ratings had said earlier this year that there is an unprecedented boom in the issuance of Malaysian private debt securities noting that their total issuance value in the first quarter of 2012 tripled year-on-year to RM38.97bil.

RAM CEO Foo Su Yin said it expected corporate bond issuances for Malaysia to total between RM80bil and RM85bil this year from about RM70bil in 2011, with most of these issuances coming from the infrastructure and banking sector. MIDF Amanah Asset Management Bhd CEO and chief investment officer Scott Lim told StarBiz that companies might have chosen the bond market because costs could actually be lower than borrowing from the banks.

“We must evaluate this on a case to case basis. Financing costs also depend on the credit rating of a particular company, thus for cases where it is cheaper to raise funds from the bond market than going to the banks, then it will not mean a reduction in profitability,” Lim said.

“For example, should a company be offered a financing facility from the bank at base lending rate + 1% and the bond markets offer them a similar financing facility but at a lower interest rate. This will mean the company indirectly saving some of the costs of raising money from the bond market,” he added.

Another fund manager with a local outfit said the outcome of such types of financing will largely depend on the terms and conditions agreed to including the debt service interest that is incurred by the company itself.

“Well, not all cases will ebb profitability by resorting to the debt market for financing. You see, there may be instances where companies going to the bond market to refinance their debts could end up with lower debt service interest. If this is the case, the company could save some money there from the difference of the interest that the company will have to service,” he said.

Analysts also noted that should there be any need to increase the overall indebtedness of a company, this must be accompanied by investments into productive assets and investments so that the company can reap benefits from these investments or assets later down the road.
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