PETALING JAYA: Malaysia’s two rating agencies appear to have different views on the likely impact Danajamin Nasional Bhd will have on the bond market.
Malaysian Rating Corp Bhd (MARC) said Danajamin may cramp the depth and breadth of the bond market in the long term as it would be difficuly for certain types of bonds to get into the market.
RAM Rating Services Bhd, on the other hand, views the financial guarantee institution as an avenue for issuers of lower rated papers like single A and BBB to secure funding given the investors’ lack of risk appetite for this credit segment.
MARC chief executive officer Mohd Razlan Mohamed said while he supported the establishment of Danajamin, he felt that over time investors and issuers should not be overly dependent on it.
“They should not treat Danajamin as a long term solution for all the risk aversion problems the market is currently facing.
“If left unchecked, prolonged reliance on Danajamin’s wrap by lower rated issuers will cause the disappearance from the market of certain rating categories of bonds, like the lower rated single A or triple B, and run contrary to the development of a vibrant and deep private debt securities (PDS) market,” he said during an interview.
He said the long-term average annual default rate for MARC’s single A rated bonds was about 2%, covering the period from the 1997 Asian financial crisis to end-2008.
Even if it went up to 4%, it was still an acceptable risk given the return profiles of the instruments, he added.
A 7%-8% per year return, which is typical of a single-A rated yield over a five-year tenure or a one in 50 chance of default for that rating class, was still considered acceptable, he noted.
Razlan added: “In the short term, Danajamin is a good vehicle to boost the present languishing bond market, but in the long term when the economy improves, issuers should be able to access the local bond market on their standalone credit quality”.
MARC, he said, would monitor and provide default rates and rating migration profiles for the underlying issues credit-wrapped by Danajamin. With these statistics, Razlan said he was hopeful that risk appetite of investors for non-wrapped issues would be restored in due time.
RAM Rating head of financial institutions ratings Promod Dass said through guarantees from Danajamin, eligible single A and BBB issuers would be able to issue bonds and have access to much needed funding.
“Single A and BBB rated issuers currently find it difficult to issue bonds given the investors’ lack of risk appetite for this credit segment.
“We understand the Government formed Danajamin for the long term with the intention for it to continue to play a key role for the bond market in good as well as challenging economic times,” he added.
Asked whether this would cause lower rated issuers to become over-reliant on Danajamin, he said it would not, as the financial guarantee institution would complement the current pool of guarantors (such as banks) in the market. This would provide an opportunity for eligible lower rated issuers to raise funding.
Over time, he said some of the lower rated issuers could see their credit fundamentals improve and be able to issue bonds on their own strength.
AmResearch in a note said while Danajamin would provide an avenue for lower-rated issuers (single A or BBB) to tap the PDS market and improve their financing flexibility, it would also shrink the supply of lower-rated PDS going forward.
An investment banker said he felt the matter was overblown as not every single bond would be guaranteed by Danajamin and have its rating automatically upgraded to triple A.
“The selection process is stringent as it depends on the investment grade ratings of the bonds. A bond with a minimum rating of BBB by independent rating agencies RAM and MARC will be eligible for a guarantee as many of such issuers are deserving companies.
“The issuers for bonds must also be involved in viable businesses that have a large multiplier effect on the economy. It must always be remembered that the setting up of Danajamin was part of the fiscal stimulus package by the Government to prop the ringgit bond market,’’ he added.
According to him, in the past three to four months even double A bonds had not fared well in the market due to investors’ risk aversion. Due to the current economic conditions, most investors are more keen on safer government papers and willing to accept lower returns.
The bond yield spread had also widened between government bonds (including triple A) and single A and other lower rated ones, suggesting greater risk aversion, the investment banker said.
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