Need for private bond guarantee market

  • Business
  • Monday, 28 Sep 2009

PETALING JAYA: The idea for a private bond guarantee market has surfaced following good response from potential bond issuers to the newly set-up financial guarantee insurer (FGI), Danajamin Nasional Bhd.

“The creation of Danajamin, which is a government initiative to provide bond credit guarantees, may trigger rethinking of the bond guarantee market among banks,’’ said Liza Mohd Noor, CEO of RAM Ratings Sdn Bhd.

However, it remains to be seen if banks will start to compete again in the bond guarantee market in a big way.

“For the moment, banks seem content to keep to their roles as advisors and lead managers,’’ Liza said.

They prefer to work with Danajamin, which hopes to be a catalyst for private bond guarantees, to obtain enhanced credit wrapping for their clients as opposed to stepping in as guarantors themselves.

Malaysian Rating Corp Bhd (MARC) sees risk appetite as the primary driver in the bond guarantee business.

“Obviously, (due to) the improvement in business climate, corporate operations and financial performance would be a key determinant,’’ said CEO Razlan Mohamed.

Bond guarantees were provided by banks prior to the 1997 Asian financial crisis, after which banks got burnt not just due to their exposure to bond guarantees but also a slump in the business environment.

Since then, the local corporate debt market has developed by leaps and bounds, while the acceptance of stand-alone corporate bonds by investors has increased.

However, the global financial crisis has increased investors’ risk aversion to the point that the lower investment grades have been unable to obtain funding from the bond market.

“There may be some reluctance for banks to provide guarantees under the current recessionary scenario as inevitably, the bond issuers who require guarantees are the financially weaker entities,’’ said Datuk Bridget Lai, CEO of Alliance Bank Bhd.

She views providing guarantees as a service that is part of traditional banking.

“There is no reason to curtail this business as long as the banks are sufficiently capitalised and willing to assume the risks for the guarantee fees chargeable,’’ Lai said.

She cautioned that when providing guarantees, banks should have well-developed risk management systems which includes stress-testing based on worst case scenarios.

They should also be able to absorb losses without risking insolvency, she added.

However, RHB Investment Bank maintains that only strong corporates should enter the debt capital market.

“If they need a bank guarantee to do so and incur the additional cost, it simply means they are not ready for the debt capital market,’’ said Peter Choong, head of debt capital market, RHB Investment Bank. “They would be better off taking a loan or other credit facilities from a bank that is better placed to assess their creditworthiness on a standalone basis.”

He noted that “banks, fearing a build-up of non-performing loans, are similarly tightening credit standards.”

“For any company that meets the credit standards, the bank would sooner fund the company and earn the interest income rather than just guarantee the papers and earn a measly commission for the same credit risk,’’ Choong added.

HSBC Bank Malaysia Bhd treasurer Piyush Kaul maintains that it would be healthy for the bond market and banking system to develop independently of each other.

This would lead to greater diversification of risk, independent evaluation and pricing of credit by two different markets, which in turn, leads to greater efficiency of financing, according to Kaul.

On the whole, Razlan of MARC sees no compelling reason for banks to be involved in the guarantee business, which therefore, is not expected to take off in a big way.

However, the success of Danajamin may encourage the entrance of privately owned FGIs.

In fact, RAM Ratings had considered this possibility in the course of developing its “FGI rating methodology” to ensure that its rating framework was sufficiently robust to cater to different FGI set-ups.

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