Malaysia's five-year credit default swaps, which investors use to hedge against risks of debt default, have jumped some 40 basis points (bps) in the first two weeks of 2015 to 142/148 bps. That compares with the performance of Malaysia's nearest peer Thailand, whose CDS have risen 10 bps, and Indonesian CDS, which have gained 14 bps.
While global rating agency S&P says 1MDB's failure to meet a loan obligation has little impact on the company's bonds, investors are worried about the wider implications for the country's sovereign rating. About 45% of Malaysian sovereign debt is owned by foreigners.
"Onshore participants are sceptical of the name, but they feel it is too strategically important and will be bailed out," said a Singapore-based credit trader, referring to the indebted and loss-making 1MDB. "You will upset lot of people including (Malaysia's) strategic partners in the Middle East if a default happens."
The concerns first emerged when oil prices started to slide, a downdraft that has taken them to their lowest levels since April 2009. Malaysia stands at A3/A-/A-, a notch higher than Thailand's Baa1/BBB+/BBB+ and three to four steps above Indonesia's Baa3/BB+/BBB-.
- TMI
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