KUALA LUMPUR: Danajamin Nasional Bhd, the country’s financial guarantee insurer, has received four applications to guarantee RM1bil worth of bonds.
A further 30 applications for guarantees are in the pipeline for potential issuance of bonds amounting to RM8.4bil.
“At the moment, that is adequate coverage for us,’’ said Ahmad Zulqarnain Onn, the newly-appointed CEO of Danajamin.
“There will be new opportunities and additional flow (of requests for bond guarantees) to us. But we are not going to hit (the present guarantee limit) RM15bil anytime soon.’’
Danajamin has a paid-up capital of RM1bil that enables it to guarantee up to RM15bil.
“As our capital base increases, we will have the capacity to underwrite more,’’ he told StarBiz, adding that the Government had so far committed RM1bil in paid-up capital to Danajamin, with another RM1bil to be given later.
A certain percentage of rejection is expected. “There is tremendous interest. Some may not qualify while others may eventually choose alternative modes of financing,’’ he said.
The financial guarantee for bonds is a new product and market education is required, especially for those who perceive that investment grade papers would automatically be guaranteed.
Danajamin uses a risk-based approach in charging its fees for providing the bond guarantee, which enables issuers to achieve AAA status. Interest is strong especially from property and construction as well as oil and gas companies. Property companies require funds for new investments while under the second stimulus package, a lot of funds are also required for investments in development projects and new factories.
“We are also expecting hotel owners to raise funds for their expansion,’’ said Zulqarnain.
In spite of the rebound in the equities market, Danajamin is expected to have a strong role in providing enhanced credit wraps for bond issuances of companies.
“There is still a general risk aversion in the bond market where single A and BBB credits are unable to tap the bond market,’’ he said, adding that Danajamin’s role was to facilitate credit flows into the bond market.
“Many of these companies are creditworthy,’’ he said. “There have been a few bad apples which turned people off. These companies can be guaranteed if we have a robust filtering system to screen them.’’
Even after paying a premium to Danajamin for the bond guarantee, companies will still enjoy cost savings once they move up to AAA status where interest paid will be less than for lower grades.
“We intend to share with the market the composition of our portfolio and its performance especially in terms of the companies’ ability to meet its debt obligations,’’ he said, adding that a good record would help to build market confidence.
In terms of evaluation of applications, Danajamin’s board could possibly be the only one with five ex-bank CEOs – Datuk Seri Hamidy Hafiz is former managing director and CEO of Affin Bank Bhd; Datuk Mohd Hanif Sher Mohamed, former CEO of Credit Corp (M) Bhd; Datuk Albert Yeoh, former CEO of OCBC Bank (M) Bhd; Datuk Mohammed Hussein, former executive director, deputy president and chief financial officer of the Maybank group; Datuk George Ratilal, formerly the managing director of RHB Sakura Merchant Bankers Bhd.
The directors are mainly involved in the approval process and governance structure of the entity.
Multiple lines of defence include evaluation by the rating agencies, filtering from banks, and at the Danajamin level, the applications go through three basic levels – underwriting, risk management and a board committee.
No doubt the banking loans market is vibrant at the moment, but over time, a trend reversal into long-term funding in the bond market is likely to take place.
The bond guarantee business has been in existence in the United States for the past 30 to 40 years. Insurers such as MBIA had done well guaranteeing municipal bonds until they went into structured finance and got burnt recently.
“We guarantee only investment grade corporates for which the risks are managed and known,’’ said Zulqarnain.
Over the past 17 years since the bond market was developed, a big database of bond defaults has been built. “We rely on that as a variable in our assessment and manage the risks,’’ he said.
In comparison with the US insurers, which are leveraged 50 to 100 times, Danajamin is only leveraged up to 7.5 times. “We are playing it very safe,’’ he said. For Bank Negara statements click here For latest Bursa Malaysia indices, charts and other information click here
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