Demand poser for private debt papers

PETALING JAYA: Even if Danajamin Nasional Bhd succeeds in helping restore confidence in the single A and triple B-rated bonds, it may not be so much a question of reviving the private bond guarantee market as the need to stimulate demand for these papers.

During an economic upswing, it is easier to find investors who are more willing take on higher credit risks for substantially higher returns.

“Perhaps to give it a nudge, the authorities could consider providing incentives to investors to hold lower-rated papers, for example, tax relief from income earned from holding such papers, and at the same time, requiring certain classes of institutional investors to hold at least a certain portion of their portfolio in such papers,’’ said Peter Choong, head of debt capital markets, RHB Investment Bank.

Citing market concerns, Choong said investors might even be lulled by the safety of Danajamin-guaranteed bonds and would eventually only have appetite for such bonds and nothing less.

To avoid a potential situation of investor complacency, one suggestion is that instead of Danajamin providing full-fledged guarantees, investors could have recourse to Danajamin for up to a certain limit in respect of any bond defaults originally “sanctioned’’ by Danajamin.

“The bonds would still be issued on a stand-alone basis. What is required is for Danajamin to ‘endorse’ a particular issue after which investors buying into the bonds would enjoy that limited recourse. This would help, to a certain extent, credit concerns of investors when investing in such papers,’’ Choong said.

Further issues that could impact the development of a bond guarantee market involving banks include the cost of credit wrap and overall cost of funding.

“In the event that credit enhancement is necessary, it is only natural for corporations to seek out a triple A rated financial institution,’’ said Liza Mohd Noor, CEO of RAM Ratings Bhd.

Since not all banks carry that rating, from the perspective of the guarantor, the premium charged must be sufficient for them to take on the credit risk.

In the end, it is a question of whether the overall coupon to be paid, after taking into account the cost of the bank guarantee, is lower than that payable on a stand-alone basis.

“There is also the question of whether investors recognise a guarantee from a financial institution to be equal to that provided by Danajamin even though both are rated triple A.

“This will inevitably have an impact on the overall funding cost. As it is, there are differences in yields amongst quasi-government issues, partly reflecting differing assessments and therefore, rewards,’’ Liza said.

The guarantee business is not easy and the pricing of risk is not a simple question.

“The guarantee industry essentially involves the transfer of risks,’’ said Meor Amri Meor Ayub, CEO of Bond Pricing Agency of Malaysia.

“The main question to ask is whether one has priced the risk properly,’’ he said. “One has to identify the true cost of credit so that in the event a credit issue, there is sufficient buffer to support any guarantee that is called up. It’s like insurer, the correct insurance must be charged.’’ – By Yap Leng Kuen

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