When less is more for Danajamin


National financial guarantee insurer welcomes banks to play a bigger role in the market

KUALA LUMPUR: May 15 marks the fourth anniversary of Danajamin Nasional Bhd, whose existence came about as part of the RM60bil second stimulus package for the local economy announced in March 2009 when the global financial system was in the throes of a financial crisis, and nobody would lend to anybody for any premium.

But for Danajamin chief executive officer and managing director Ahmad Zulqarnain Onn, the more momentous date for the national financial guarantee insurer would be June 29, 2010.

“This is the more important date for us, as this was the first time we guaranteed a transaction,” he told StarBiz.

Since then, Danajamin has guaranteed or co-guaranteed RM6.1bil worth of bonds and sukuk.

Between that first guarantee and now, much has happened.

Danajamin was formed to provide financial guarantees and enhance credit for non-triple-A rated companies which could not get funding from the capital markets, as it had seized up in the wake of the US subprime crisis.

Now, the double-A rated segment of the bond/sukuk market has become more vibrant, partly due to economic growth in the intervening years, a recovery in the capital markets and the role played by Danajamin in helping to stimulate and further develop the private debt securities (PDS) market.

Therein lies the paradox because Danajamin would play a smaller role as the PDS market deepened and private participants such as banks played a bigger role in financial intermediation.

Zulqarnain said it had become obvious in the last couple of years that double-A rated issuers had no need for Danajamin's services.

“That they don't need us and the banks don't need to talk to us about credit enhancement is great,” he observed.

Danajamin has also since 2011 been working hand-in-hand with banks to offer co-guarantee and syndicated guarantee arrangements as part of a strategy to nudge market participants to a bigger role while it takes a backseat.

Danajamin would guarantee the longer-term bonds while the banks guaranteed the shorter-term ones.

“We started off by guaranteeing an entire transaction. Now, the banks take the more visible role. As we've said before, we're not here to compete with private participants but to complement them,” Zulqarnain pointed out.

He said Danajamin started off in the partnership guaranteeing the larger portion of the debt. In 2011, the ratio was three-to-one and last year it was three-to-two.

“Going forward, we target a ratio of one-to-one and that's a target we may achieve either this year or next,” Zulqarnain said.

A good example of the reduced role would be the latest transaction in which Danajamin had agreed to guarantee RM260mil out of an RM850mil bond offering from Quill Retail Malls Sdn Bhd.

The remainder would be guaranteed by DBS Bank Ltd and United Overseas Bank Bhd.

But the question still remains: Will there still be a need for or a role for Danajamin? “I think that's a question that is best asked by the market and by market participants,” Zulqarnain said.

Would Danajamin then be going through existential angst as its role diminishes? Judging from his answer, not anytime soon. “There continues to be a need for a credit enhancer for a typical single-A rated issuer,” he said.

The other crucial role, Zulqarnain said, would be to provide long-term capital to companies so that they could easily match their assets to their liabilities and provide a platform for banks and potential issuers to come up with solutions that would be feasible to all parties.

“A credit enhancer's role is to improve the credit rating of a particular issuer. If you're rated single-A, then with the credit enhancement, you become triple-A. When investors buy the bonds, they'd buy based on the enhanced credit rating,” he said.

According to data from Bond Pricing Agency Malaysia, gross PDS issuance excluding quasi-government bonds came up to RM120.03bil last year, 60% higher than 2011.

Data from Malaysian Rating Corp Bhd and RAM Rating Services Bhd showed that the vast majority of the PDS issuance continued to be either double-A or triple-A rated.

“We have asked the banks regularly what their preferred role for us in the market place was,” Zulqarnain said.

“What we dont want to do is perpetuate our existence. That's not what we're here for. We exist to help develop a vibrant capital market and we want all classes of issuers to be able to tap long-term capital,” he said.

Nevertheless, Zulqarnain said the lesser of a role Danajamin played, the better. “The more the private participants involve themselves, the better it is for us,” he said.

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