This article first appeared in Wealth, The Edge Malaysia Weekly on June 26, 2023 - July 2, 2023

TG Excellence Bhd’s perpetual sukuk (TOPGMK 3.950% Perpetual Corp MYR) issued on Feb 27, 2020, may be an investment option for fixed income investors with a higher risk appetite, says Ivan Koo, senior fixed income fund manager at AmanahRaya Investment Management Sdn Bhd (ARIM).

The perpetual sukuk’s (perp) first call date is due on Feb 27, 2025. Its annual coupon rate is 3.95%. But investors interested in purchasing the perp on the FSMOne Bond Express platform can buy the paper at a net yield to the next call of 4.53%, at an indicative ask price of RM98.24 (as at June 14). It means investors will receive 4.53% return per annum if they hold on to the paper until its first call date, net of the processing and platform fees imposed by the platform.

The minimum investment amount for the perp is RM250,000 available on the Bond Express platform. For wholesale corporate bonds, FSMOne charges a 0.5% fee on the nominal value of the bonds and a 0.045% platform fee per quarter, which adds up to 0.68% a year, according to its website.

Based on the credit analysis report by MARC Ratings Bhd (MARC), TG Excellence is a special purpose vehicle set up in September 2019 to raise funds for Top Glove Corp Bhd. The perp it issued is “unconditionally and irrevocably guaranteed by Top Glove”.

MARC’s report, published on March 28, accorded the paper a rating of AA-. The report also mentioned that MARC revised Top Glove’s corporate credit rating to “negative” from “stable” as tough global market conditions for glove manufacturers will weigh down the group’s performance.

However, Koo favours the paper as it offers one of the best yields compared to other issuances in the similar rating band. He adds that ARIM is one of the biggest bondholders of Top Glove and that the firm has been buying TG Excellence perp as its yields gradually went up.

The key risk of the paper is that it could be further downgraded by MARC to A+ from its current rating of AA-, which would impact its price, says Koo. But it will not affect investors who hold on to the paper until the first call date and get back their principal.

Investors also should not forget that the coupon rate for the perp is 3.95% upon issuance, and its yield hit 5.572% at one point while the price fell. This indicates that the market is less confident on the paper and is increasingly pricing the perp as if it wouldn’t be redeemed upon its first call date, notes Charanjeev Singh, founding partner of NewParadigm Capital Markets. “If you look at the pricing of 3.95% at the point of issuance in 2020, it’s as if this bond is going to be a five-year bond. [But] since [the Covid-19 pandemic] has abated, and glove companies are not making as much profit as they used to, it looks like they are not going to redeem the bonds because they’re at a stage where they are conserving capital. That is why the yields have gone up,” he says.

According to its LinkedIn profile, NewParadigm Capital Markets is an independent and privately-owned corporate finance advisory firm licensed by the Securities Commission Malaysia.

Such a view resonates with Cheong Ting Fung, research analyst of the fixed income division at iFast Capital Sdn Bhd, the company behind FSMOne’s Bond Express platform, which distributes single bond issuances to investors in smaller sizes.

“Our view is that TG Excellence does have an incentive to not call back the perps at the first call date as borrowing costs are high currently. This makes refinancing from the market less appealing and increases the possibility of the issuer not calling back its perp,” he says.

However, by not calling back the perp, the issuer would also have to pay a higher rate to investors.

According to FSMOne, the reset rate, or the new rate that the issuer has to offer its investors if the perp isn’t called on its first call date, equals 1%+, an initial spread of 2.209%+ over the prevailing five-year Malaysian Government Securities (MGS) rate.

As at June 14, the five-year MGS rate was 3.519%.

In short, if the issuer opts not to call back the paper during the first call date, it would have to offer investors 6.728% based on the current rate of the five-year MGS.

Partly based on the seemingly high reset rate, ARIM’s Koo has a different view that TG Excellence is still likely to call back its perp at its first call date.

For one, he says Tan Sri Lim Wee-Chai, founder of Top Glove, and the company’s management team are very prudent. They care a lot about their reputation and promises made to investors.

Not redeeming the perp would hurt Top Glove’s reputation and its future funding rates. It is rare in the local market that perp issuers do not redeem their papers on the first call date, he says.

“I don’t think they will risk their reputation and credit profiling. If they do it just once, the market would remember it for the many years to come. If they want to tap into the financial markets for funding again in the future, investors could ask for higher rates. It has a huge impact on the company.”

Koo adds it wouldn’t be hard for Top Glove to refinance its existing perp too. It means that the company can issue a new perp at a higher rate, but still lower than the 6.728% reset rate, in his view, and use the money to redeem the outstanding perp from existing investors.

On top of that, Koo believes Top Glove still has good financing capacity, which means it has room to borrow money from the banks.

The demand for rubber gloves could come back stronger after 12 months, even though it is expected to remain weak in the shorter term, Koo opines. The average selling price (ASP) of rubber gloves may have gone up by then, sooner than the first call date of the perp.

While Koo isn’t an equity fund manager, he says the share price of Top Glove has gone up by over 26% year to date as at June 14. “Sentiment-wise, while some might still be avoiding the sector, investors in general do buy into the fact that the glove industry could do well beyond 12 months. Though not in the shorter term,” he says.

Meanwhile, iFast’s Chong adds that investors should be aware of interest deferral risks when investing in perps, that is, the issuer could opt to defer interest payment without constituting as a default.

On this, Koo is confident that Top Glove wouldn’t defer the interest payment as it will hurt its reputation and fundraising prospects. “The company has not skipped [any coupon payments] before. And it has always paid back the principals to the bondholders upon the maturity dates.”

MARC’s credit analysis report shows that Top Glove has a strong adjusted debt-to-equity (DE) ratio of 0.23 times. With cash balance at RM703.9 million, the adjusted DE ratio is low at 0.11 times.

The report notes that the company has strengthened its capital structure by reducing its borrowings substantially and having a wider equity base stemming from a strong financial performance in financial year 2020 (FY2020) to FY2021.

“This provides headroom to protect its balance sheet strength amid the challenging operating environment.

“Given the deferment of capex (capital expenditure) plans, we do not expect any substantial rise in borrowings level. We understand that the group could put on hold dividend distribution on the back of weak earnings; typical dividend payout is at about 50% of annual profit,” according to the report.

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