SLOW TAKE-OFF FOR RETAIL BONDS

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The maiden RM300 million sukuk from DanaInfra Nasional Bhd to partially fund the Klang Valley’s mass rapid transit (MRT) kicked-start retail trading of bonds on Bursa Malaysia and would also likely attract the issuance of private debt securities like conventional bonds and Malaysian Government Securities (MGS) made available to the public. The expected issuance is necessary to promote Bursa Malaysia as a market for retail sukuk, he said. DanaInfra is so far the only institution to have issued sukuk on the bourse's Exchange Traded Bonds and Sukuk (ETBS) platform. ETBS offers an opportunity for retail investors to diversify, although its new nature means it is often evaluated in the same way a stock would be, said Jamaluddin. "They are going back to typical equity-type thinking, chasing yields." The government, in the budget last year, announced incentives for companies issuing bonds and sukuk. These include offering companies a double tax deduction for a period of four years for additional expenses incurred in such issuances.

However, there is a "negative perception" that ETBS bonds are more costly than raising funds on the OTC bond market and equity market. There was speculation that the first issue was undersubscribed because the offer period was extended by a week. The announcement that the indicative profit rate would be at 3.7% has seemingly left investor cold. Retail bonds, unlike shares, have a shelf life indicated in their tenure. For the RM300 million sukuk, it is 10 years. The problem with this type of investors’ trading inclination is that it would run contrary to bond’s long-term investment horizon. Moreover, such trading patterns could also likely cause some price distortion between the retail bond market and the over the counter (OTC) market, where investments are done solely by institutional and some high net worth individuals that starts with a minimum investment of RM5 million while retail bonds are at RM1,000. As for transaction cost, an industry participant said that the cost for the OTC market is way lower compared to the retail bonds, likely due to the large transaction amount in the over the counter (OTC) market. The OTC market per transaction cost could be as low at 0.01% compared to a cost of 0.33% in retail bonds. Another concern is investors’ awareness on retail bonds and whether they are comfortable with such asset class. The likelihood of investors who are not knowledgeable on retail bonds would be on the downside. They would likely be ill-prepared for such investments.

Retail bonds are debt instruments while equities are businesses that can make or lose money. Sukuk pay a fixed profit rate and in the case of conventional bonds pay coupon rates. In short, bonds and shares are two totally different asset classes. As such, they have different investments horizon and objectives. It needs to be understood that the positive correlation of risk and reward is clearly reflected in the pricing of these instruments, as the yields are established during the book-building of the over-the-counter (OTC) market. The existing ETBS listings of DanaInfra offer returns superior to fixed deposits with financial institutions, higher than sovereign yields but very low credit default risk as they are guaranteed by the government. DanaInfra's second sukuk, priced based on OTC rates, was oversubscribed 2.19 times. Bursa Malaysia is now courting several financial institutions and government-related agencies to be issuers on ETBS.

DanaInfra is in the process of issuing its third sukuk. The seven-year RM100 million sukuk will carry a coupon rate of 4.23%. The offering, which opened on July 21, was due to close on Aug 15 and be listed on Aug 27. The investment offers pre-determined returns in the form of coupons that are paid out twice a year. Investors need a minimum of RM1,000, which is equivalent to 10 units, to start investing at the initial public offering stage. While there is no fee at point of subscription, the transaction cost on the secondary market is 0.33% of the trade value. According to DanaInfra’s prospectus, the ETBS offered to retail investors have the same characteristics as the bonds/ sukuk distributed to institutional investors. The difference lies in the distribution platform for primary issuance as well as the secondary trading. The ETBS is exchange-based while traditional bonds/ sukuk have to be traded OTC among institutional investors. The other difference is the lot size per transaction. The ETBS is transacted in lots of RM1,000, while the institutional investors transact in lots of RM5 million. The institutional investors might offer their holdings to retail investors via exchange while banks act as intermediaries by breaking the lots and distributed in retail lots.