Interest rates, water bonds saga could hit MRT funding

By Lee Wei Lian, The Malaysian Insider

KUALA LUMPUR, March 1 — The multi-billion Klang Valley Mass Rapid Transit (MRT) may cost more if interest rates are hiked as expected later this year.

While the government has not revealed details on how the MRT will be financed, the options include raising money from the local bond market or banks, both of which will become more costly as interest rates go up.

Analysts expect Bank Negara to raise interest rates to combat inflation although some earlier forecasts for a rate hike by the second quarter have been revised to the second half of the year due to worries over moderating economic growth.

“Cost of funds will rise in tandem with interest rates,” said Lum Choong Kuan, head of fixed income research at CIMB Bank.

“If the overnight policy rate rises, corporate bond yields will rise. The impact depends on whether the bonds are government guaranteed or AAA rated. If there is a government guarantee, the SPV (special purpose vehicle) can tap the market with a cheaper rate.”

There is a difference of opinion however on whether the government can obtain cost savings by taking advantage of current low interest rates.

RAM Holdings chief economist Dr Yeah Kim Leng said that if the government could tap into the current ample liquidity in the market, they could lock in some cost savings.

Lum however said that there is no point in raising funds now as the details of the system have not been finalised.

Other factors that could affect the cost of funding is the recent episode involving Selangor’s water industry concessionaires which are at risk of defaulting on their payment obligations to their bond holders following a protracted battle with the state over payments.

Yeah said that the whole saga over what has come to be known as the “water bonds” has “left a bad taste” in investors’ mouths.

“Investors have become more cautious,” said Yeah adding that if they perceive a higher risk, they may attach a risk premium to bonds which in turn will push up yields and increase the debt servicing burden.

He said that to lower any perceived risk, the government has to ensure that the economics of the MRT system are sustainable and that it can generate sufficient cash flow.

Yeah noted that investors are now shifting their attention to higher quality bonds rated “AA” and above where previously an “A” rating was sufficient to attract institutional investors.

To help boost the attractiveness of the MRT bonds, Yeah said that credit enhancement mechanisms can be employed, such as government guarantees and insurance from financial guarantee institution, Danajamin.

Lum doubted however if the water bonds issue would weigh heavily on investors’ minds.

“Investors have gone through uncertainties before such as the windfall taxes on the power producers,” he said. “The risks are known and it also depends on the yield. It’s all a matter of pricing. Investors are aware of the risks. But it’s in the government’s interest to keep it credible.”