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D. FACILITATING BOND MARKET ACCESS FOR SMALL AND MID-SIZED ISSUERS
For the bond market to be more inclusive, there is a need to address various structural factors. The corporate bond market is dominated by large corporate issuers, primarily consisting of companies in the banking, property and infrastructure sectors. Participation by small and mid-sized issuers with an issuance size of less than RM250 million remains limited. Smaller bond issuances with a rating of A and below, face a higher cost relative to funds raised and a lack of appetite from institutional investors – most of which have mandates for bonds with higher creditworthiness. In addition, the bond market ecosystem has remained largely status quo over the last decade. To cater to small and mid-sized issuers, the bond market ecosystem will require disruptive innovations, including alternative venues or platforms with unconventional issuance processes and credit rating mechanisms. Such innovations may result in better cost efficiencies and eventually facilitate more issuers to tap into the bond market.
Besides relatively high fees vis-à-vis funds raised, smaller companies issuing bonds are subject to higher risk and liquidity premiums. These higher risk and liquidity premiums further add to the issuance cost as investors would demand higher yields for such bonds. This arises due to the small pool of investors with the appetite for higher-risk bonds. To encourage broader investor segments to participate in smaller bond issuances, there may be a need to consider different mechanisms in the market which allow credit enhancements for MTCs or credit hedging for investors. These mechanisms may allow investors to reduce their credit risks or ensure greater credit protection. This in turn may encourage greater liquidity for lower- rated bonds, thus unlocking access to more competitively priced liquidity premiums for lower-rated issuers.
Experience in other jurisdictions show that the availability of alternative bond marketplaces augurs well for the development of the deep and liquid secondary bond market. The modalities deployed by other jurisdictions include the ‘electronification’ of OTC trading to improve price discovery, as well as marketplaces that warehouse the bonds’ credit risks and split them into tranches before distributing the risks to a broader group of investors. Such marketplaces can add diversity to the current bond market intermediation landscape and enable an ecosystem that is more inclusive for small and mid-sized companies.
3.1.2 ENABLING A MULTI-LAYERED MARKET
In recent years, there has been an emergence of alternative marketplaces with innovative business models and instruments, such as ECF, P2P financing, DAX and IEO platforms. Each of these provides new avenues for fundraising and investment. Such marketplaces were only made possible through advances in technology, which enables a platform-driven approach to serve issuers and investors. These marketplaces provide direct and swift market access as well as a more efficient cost structure for issuers and investors.
There are various types of marketplaces as outlined in Diagram 4 – each offering distinct value propositions to specific issuer and investor segments.
CAPITAL MARKET MASTERPLAN 3
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