The various stages of issuing bonds in Malaysia

In the last posting, I have given a summary of all the key infrastructure in the Malaysian bond market. In today's lesson, we shall go in detail to the various stages that a bond will have to go through before it could be sold in the market. There are three stages. These are:

(i) Pre-issuance 

•The idea of tapping the bond or sukuk markets is cultivated at this stage. Companies with various forms of capital requirements should obtain advice from financial advisers on the feasibility of this move. Whether refinancing existing obligations or funding new ventures or expansion, the bond and sukuk markets are much more likely and able to fulfil the needs of the potential issuer, compared to directly approaching lenders. The Malaysian bond market is competitive, characterised by many investors with varying degrees of risk appetite. It is therefore relatively easy to find natural partners throughout the risk-reward spectrum.

•There are several stakeholders in the pre-issuance phase. Apart from the potential issuer, professional service providers such as credit-rating agencies, legal and accounting firms, Shariah advisers, trustee companies and the banking fraternity will be actively involved at this stage. This is where private advisory outfits aggressively compete against established financial institutions vis-à-vis providing financial advice to potential issuers.

• The structuring of bonds and sukuks is also done at this level. Financial advisers will design a bond or sukuk structure that will maximise the potential issuer’s attractiveness. During this process, external support from guarantors and underwriters may be required. For sukuks, Shariah advisers will provide the necessary input to ensure that the structure conforms to Shariah principles. Regulatory approval will also need to be obtained at this stage.

(ii) Primary Market  

•With the structure of the bond or sukuk in place, the process of getting investors for the instrument begins at this stage. The arrangers will execute the transaction via the Fully Automated System for Tendering (“FAST”) managed by BNM, either with Tender Panel Members or Principal Dealers. Money from such transactions will go through the Real-Time Electronic Transfer of Funds and Securities (“RENTAS”) system, also managed by BNM. Trading information, which had previously been tracked by the Bond Information and Dissemination System (“BIDS”) - managed by BNM – was taken over by Bursa Malaysia on 10 March 2008.

•There are a number of new stakeholders in this phase. Tender Panel Members, Principal Dealers, trustees and BNM are represented at this stage. BNM plays a major role at this point as it provides the market infrastructure for deal reporting as well as facilitating the transaction, including transfers of money and security deposits.

•For the issuer, this is the most critical period; expectations vis-à-vis the pricing of the instrument will now be tested. If successful, proceeds from the issuance of the security will either be as expected or more, depending on the economic environment at the point of issuance. If unsuccessful, issuers may have to fall back on underwriters (if any) to take up the shortfall.

(iii) Secondary Market  

•At this stage, the securities can be actively traded among investors in the market. RENTAS, BIDS and trustees continue to play their roles of facilitating the transaction. Since only a small portion of the available bonds and sukuks are traded, daily prices generated by bond-pricing agencies are available for referencing by investors and other market participants.

•New Additional stakeholders at this stage are the money brokers and Non-Principal Dealers. The next section of this chapter will provide more detailed information on each of the stakeholders.