Role of Credit Rating Agency in Malaysian Bond Market Afri Africa can n Union Union f for or Hou Housing sing Fin Finan ance ce Con Confer eren ence ce Dar Es Salaam, 8 October 2012 Chong Kwee Siong Technical Advisor, Group CEO Office RAM Holdings Berhad
Financial Marketplace Capital Banking Market System Equity Debt Equity Private Corporate Public Debt Linked Debt Securities Market Derivatives Market Quasi-Gov Bonds Sukuk Gov Bonds Bonds 2
Benefits of a vibrant local currency bond market Disintermediation Mobilise savings for capital formation Mitigate currency and tenure mismatch Reduce systemic risk
Malaysia LCY bonds issued: USD167bn (2011) 4
Malaysia Outstanding LCY bonds: USD294bn (June2012) 5
Malaysia LCY bonds market: 102% of GDP (June 2012) Size of Malaysian Domestic Bond Market (% of GDP) 6 Source: asianbondsonline
Malaysia 2 nd largest bond market in Asia ex-Japan Domestic Bond Markets in Asia (ex-Japan) Source: asianbondsonline 7
Bond market an important component for capital formation Domestic Financing Profile Pre-Crisis As a % of Equities Bank Loans PDS GDP 1995 254.2% 133.2% 10.2% 1996 318.0% 125.8% 13.2% 1997 133.4% 142.6% 16.5% Post-Crisis As a % of Equities Bank Loans PDS GDP 132.2% 139.6% 16.5% 1998 183.8% 125.5% 25.7% 1999 2000 129.9% 116.0% 29.4% 2001 139.0% 123.0% 37.2% 41.2% June 2012 8
Malaysian Experience Development Catalysts Privatisation: Increased private sector financing demand due to privatisation and emphasis on private sector-led growth Infrastructure Development: Huge increase in capital financing requirement especially for infrastructure development. Bonds could be structured to match longer tenure requirements Corporate debt restructuring: Provide long term financing to address funding mismatches Financial Sector Liberalisation: Efficiency gains from disintermediation and competition - cheaper funding for companies issuing bonds and better returns for investors Fill the missing segment of the risk-return investment spectrum: fixed income instruments in addition to FD and Equity 9
Wide base of institutional investors LCY Government & Corporate Bonds Investor Profile 10
Regulatory & Market Reform Measures Infrastructure & Institutional Building Regulatory Framework Fiscal & Financial Incentives • Cagamas • Guidelines for PDS • Tax exemption • RAM, MARC • Guidelines for ABS • Stamp duty waivers • Mandatory ratings • 1993: Securities • Reduction in Commission withholding tax • Malaysian Institute of Bond Dealers • 1999: National Bond Market Committee • RENTAS • Guidelines for Sukuk • Bond Pricing Agency Malaysia • Guidelines for REITs • Capital Market Master Plan 11
Rationale for establishing RAM • A “missing link” 1 institution in financial system credit • Independent ratings 2 provider of credit opinions • Developmental role Market education, training, 3 credit culture, talent for the bond market development, information dissemination, etc. 12
What are credit ratings? “ An objective and impartial opinion on: the ability and willingness of an entity to make full and timely payments of all its financial obligations, or creditworthiness of a particular debt obligation ” 13
What it is NOT A recommendation to buy or sell investments An audit Any measure of defining good or bad companies Ratings do not measure… Prepayment risk of the security Market price of the security Fraud Rating changes 14
Functions of credit ratings • Provision of aggregate information about the credit quality of sovereign entities, corporations, financial institutions, and their related debt offerings (“ Information function”) • Accessibility to global and domestic markets given the familiarity and widespread acceptance of credit ratings as a common yardstick for measuring credit risks and their continuous surveillance by CRAs (“ Monitoring function”) • Enhance liquidity through widening of investor pool through the widespread use of credit ratings (“ Certification function”)
Applications of credit ratings Issuers & Regulators Investors counterparties • Common measure of • Help bridge information • Supports disclosure & credit risk to help make gap between issuer and transparency investment decisions investors • Promotes a more • Independent third party • Provides independent efficient capital market opinion peer comparisons • Help eliminate • Assist in portfolio • Enhances terms and monitoring asymmetric information conditions of borrowing • Facilitate implementation • Benchmark for risk of risk frameworks • Enhances access to premium new sources of funds • Distill complex financial instruments into user- friendly rating symbols 16
Applications of credit ratings Yield curves and spreads Systematic relationship between credit ratings and yields Malaysian Yield Curves Corporate bonds spread over 10- year MGS % % 30 14 12 25 10 MGS 20 AAA 8 AAA AA2 6 AA2 A2 15 A2 BBB2 4 BBB2 BB2 10 BB2 2 B2 0 5 3-Jan-06 3-Apr-06 3-Jul-06 3-Oct-06 3-Jan-07 3-Apr-07 3-Jul-07 3-Oct-07 3-Jan-08 3-Apr-08 3-Jul-08 3-Oct-08 3-Jan-09 3-Apr-09 3-Jul-09 3-Oct-09 3-Jan-10 3-Apr-10 3-Jul-10 3-Oct-10 3-Jan-11 3-Apr-11 3-Jul-11 3-Oct-11 3-Jan-12 3-Apr-12 3-Jul-12 0 1m 3m 6m 1y 2y 3y 5y 7y 10y 15y 20y Source: BPAM 17
• RAM Ratings 18
RAM Ratings RAM Rating Services Berhad (previously known as Rating Agency Malaysia Berhad) was incorporated in 1990 as the first credit rating agency in Malaysia Set-up as a Central Bank initiative to develop the corporate bond market Regulated by the Securities Commission Our shareholders Fitch Ratings 4.900% United Overseas CIMB Bank RHB Bank Malayan Bank Public Bank Hong Leong Fitch Ratings Berhad Berhad Banking Affin Bank Standard & (Malaysia) Berhad Bank 4.900% Berhad Berhad 14.425% 8.850% Poor’s Berhad 5.325% 4.000% 6.900% 3.600% 4.900% 4.200% 19
Key milestones Awarded: 1) Most Outstanding Rating Agency for Sukuk by KLIFF 2) Best Research in Islamic Finance from Dubai- 2011 based CPI Financial 3) Best Islamic Rating Agency 2011 by Red Marks 20 th Anniversary & first 2010 Money Group, Kuala Lumpur Corporate Social Responsibility event 2009 First state rating assigned Launched nation’s first Sukuk Handbook 2008 & Corporate Reorganisation RAM Ratings formed 2007 Voted World’s 2 nd Best Islamic CRA 2006 Rated first partnership- 2005 based Sukuk Inaugural RAM League Awards 2004 Launched first Islamic 2003 Finance Bulletin First corporate default 2000 study report released Rated first insurance 1997 company Rated first Islamic Sukuk 1994 1993 Rated first financial institution 1991 Rated first corporate bond 20
Our teams and footprint Consumer & Industrial Ratings Real Estate & Construction Ratings Infrastructure & Utilities Ratings Financial Institutions Ratings Structured Finance Ratings Islamic Ratings Public Finance Ratings Data & Analytics
Our coverage by issuers Foreign Issuers Rated DBS Bank Limited - Financial Institution Rating Abu Dhabi Commercial Bank PJSC - Financial Institution Rating Noble Group Limited - MYR3.0 billion Multi-Currency ADCB Finance (Cayman) Ltd – MYR3.5 billion Sukuk Murabahah Programme Senior Unsecured MTN Singapore Emirates NBD PJSC – Proposed MYR3.8 Bank of Tokyo-Mitsubishi UFJ Limited 7% billion Senior Unsecured Conventional or - Financial Institution Rating Islamic MTN Programme Hong Kong 7% National Bank of Abu Dhabi PJSC Hana Bank – MYR1.0 billion Nominal - Financial Institution Rating UAE Japan Value Multi-Currency MTN Programme - MYR3.0 billion Senior Unsecured Islamic / 33% 7% Conventional MTN Programme Hyundai Capital Services, Inc – MYR2.0 billion MTN Programme Abu Dhabi National Energy Company PJSC Industrial Bank of Korea – MYR3.0 - MYR3.5 billion Sukuk Murabahah billion Conventional and / or Islamic Programme MTN Programme National Agricultural Cooperative Federation – MYR3.3 billion Senior Notes MTN Programme South Korea 27% Kingdom of Saudi Arabia Gulf Investment Corporation 13% - Financial Institution Rating Kuwait 6% - MYR600 million Senior Unsecured Bonds Dar Al Arkan Real Estate Development Company - MYR400 million Senior Unsecured Bonds - Corporate Credit Rating Al Bayan Holding Company - MYR3.5 billion Sukuk Wakalah bi Istithmar - Corporate Credit Rating Programme
Our coverage by bond value Asset- RAM-Rated Bond Value : RM746 billion Backed Securities Diversified Holdings Public Finance 4.3% 6.6% 0.2% Infrastructure & Utilities 35.9% Financial Services 38.8% Trading & Services 2.3% Mining & Petroleum Transportation 1.8% Plantation 2.1% & Property & Consumer Industrial Agriculture Construction & Real Estate Products Products 0.4% Engineering 3.9% 0.9% 1.5% 1.4% As at end-March 2012 23
International Recognition The Most Top Domestic Rating Outstanding Agency in the Asia Rating Agency for Pacific Region by Asian Development Bank Sukuk 2011 The Most Influential Rating Agency in the Best Research in Region Islamic Finance 2011 by Dubai- 24 based CPI Financial
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