Topic 3: BONDS

The Malaysian bond market today

The domestic bond market has grown by leaps and bounds over the past
decade and is now the third-largest in Asia in terms of size relative to gross
domestic product.

The countrys bond market has grown tremendously over the past 14 years
to become the third-largest bond market in Asia relative to gross domestic
product (GDP). The number one spot belongs to Japan, while South Korea
is in second place as at end-2014.

Malaysian bond markets size is impressive. As at end-2014, it was RM1.1

trillion, Malaysias bond market grew annually by 10.8% with outstanding
debt securities tripling from RM273.1 billion in 2000 to RM758.6 billion in
2010.
highlighted that the corporate portion of the bond market was a very
important source of long-term financing for the private sector between
2003 and 2013.
with one-third originating from the infrastructure and utilities sector.
In the five years from 2009 to 2013, approximately 75% of all funds
raised from the capital market originated from the bond market.
A large portion of these bond issues related to funding required under
the five-year Malaysia Plan, the national Economic Transformation
Programme (ETP) and the countrys regional development corridors.

 The percentage of corporate bonds is about 40% and government

bonds around 60% that in 2000, the local bond market was worth RM
125.5 billion, around 35% of the GDP at the time.
As at end-2014, it was worth RM 456.5 billion, which is about 42.7%
of the GDP.
In January 2006, the Securities Commission issued guidelines for the
introduction of bond pricing agencies (BPA).
BPA's objective is to provide daily fair value prices of all MYRdenominated bonds traded in the over-the-counter market. Currently,
Bondweb Malaysia is the only registered BPA.
SUKUK
Malaysia is currently home to the largest Islamic bond (sukuk) market
in emerging East Asia, according to the Asia Bond Monitor March
2015 edition.
majority of Malaysias bond market are composed of sukuk,
representing 52% of the total bond stock at end-December 2014.
In the fourth quarter of 2014 (4Q14), sukuk accounted for a 38.7%
share of the government bond sector and a 70.8% share of the
corporate bond sector.
Current Issues
Due to the slump in world oil prices and concerns among international
investors about the impact on the Malaysian economy and the
external account position, non-resident investors were net sellers of

Bank Negara Monetary Notes (BNMN) during the second half of

2014.
foreign holdings of BNMN fell from 72.5% of total notes in 2013 to
56.6% by the end of 2014
However, foreign holdings of Malaysian Government Securities
(MGS) and Government Investment Issue (GII) were little changed,
he said, at 29.2% of total MGS and GII by the end of 2014, compared
to 29.4% in 2013
Reasons cited: theres the weaker ringgit, the lower oil prices, that
bear on how external sovereign investors look at Malaysia, the global
expectations on the Federal Reserves potential hike in rates, our
own macroeconomic conditions which are a bit more challenging this
year, and of course the spotlight on 1Malaysia Development Bhd.
foreign ownership of BNM debt securities declined further in March,
The fall in the value of foreign-held securities is partly attributable to
the RM18.1 billion of papers redeemed in March alone, coupled with
the absence of issuance from BNM since January. Still, foreign
ownership accounted for a large proportion (68.3%) of BNM
securities in March2015.
Standard & Poor Ratings on Malaysia as at August 2015:
1. Foreign currency sovereign credit rating on Malaysia
A- long-term
A-2 short-term
2. Local currency sovereign credit rating on Malaysia
A' long-term
A-1 short-term

Article 1: What Can Bond Investors Do To Mitigate Defaults

21 March 2011, The Edge Financial Daily

Investors buy bonds on expectation that they would get paid in full at
maturity, particularly the high grade issues. Hence bond defaults can be
very painful for bond investors. When the ratings of bonds are downgraded
and likely heading into default, the issuers ability to service the interest and
repay the principal become highly doubtful. As the companys financial
health deteriorates, the company will start breaching the bond covenants
i.e sinking fund requirement, debt to equity ratio, etc. Thus the painstaking
process of recovery commences.
When bond defaults becomes a reality, bond investors are more likely to
lose some, if not all of the capital invested in the debt. Therefore it is
paramount for bond investors to be able to claim or recover its capital
within the terms and conditions of the bonds as stipulated in the Trust
Deed. A Trust Deed is an agreement between bond issuer and
bondholders covering terms of bond issuance. The bond terms normally
include both positive and negative covenants, event of default,
identification of the collateral, call provisions and appointment of trustee.
Why do bond goes into default? The main reason being its deteriorating
financial health, thus its ability to service the interest and repay the debt is
in serious doubt.
More often than not, the companys cashflow is severely affected up to the

point where the company is not able to generate income to repay its debt
obligations. Some of the factors affecting the cashflow include business
environment, overestimation of projected income, mismanagement (fraud
& breach of trust), political intervention, regulatory changes and
overextending balance sheet (excessive borrowings).
Depending on the severity of the financial health of the company,
bondholders basically have two choices in hand when the bonds are
downgraded to default by the rating agency;
1. To restructure the bond (if it thought that the company is worth
keeping as a going concern)
The former will include a restructuring plan that involves detail
analysis, discussions as well as negotiations on terms and conditions
of the plan between the issuer and the bondholders.
2 Call for an event of default.
An event of default can be called by the bondholders if all avenues to
save the company failed or in some cases a crime (fraud) has been
found. The event of default would most likely trigger a cross default
on all of the companys other borrowings.
There are nascent signs that bondholders are made aware that the
company may face financial difficulties via its financial reports, rating
action (downgrades) or breach of covenants.
The bond might be heading towards defaults soon if the breaches of
its financial covenants or its financial issues are not addressed

immediately.
The trustee, acting on behalf of the bondholders, will remind the
issuer of any breaches of the covenants and to request the issuer to
rectify the matter.
Should the breaches are not rectified, the trustee will inform the
bondholders and seek the next step of actions.

Recovering the capital when the bond has defaulted can be a long and
arduous task for bond investors. More so if the bondholders are classified
as unsecured lenders, meaning the bonds are not collaterized against any
of the companys fixed assets or are not guaranteed by third parties.
Being grouped in the unsecured lenders means that bondholders will have
to share the claims over the assets, or whatever left from claims made by
secured lenders, with other lenders i.e loans, financial facilities etc. Hence
it is important for bondholders to seek avenues in order to maximize its
claims or recovery from the issuer. However, more likely than not, the
recovery process will have to go through legal process which may take
longer time to settle.
So what can bond investors do to mitigate the defaults?
i.

First and foremost, bond investors need to understand that

defaults are part of the credit risk that bond investors have to take
when investing in bonds especially corporate issuances. Investors
also have to take a proactive role in monitoring the financial health
of the issuer by reviewing the credit standing of the company at

regular intervals.
Investors need to understand the risks involved in investing
in that particular bond investor to study and understand
the Information Memorandum (IM)
ii.

Analysis should also cover the macro factors affecting the

company

i.e.

industry,

economic

environment,

geopolitical

conditions, etc.
The constant monitor may provide an early signal to the
bond investors on the financial state of the issuer and will
give bond investors an inkling on its next step of actions.
At the same time, credit analysis by rating agencies could
be used as an independent credit views or a second opinion
whilst the decision on the credit should eventually still lie
with the investors.
iii.

Bond trustees can also play an important role in helping bond

investors protect the investment in the debt papers.
Trustees, in most cases, acts on the instructions of the
bondholders

with

regards

to

legal

matters

and

documentations of the bonds. In addition,

trustees also have the responsibility to ensure the bond
covenants and financial requirements as stipulated in the
Trust Deed be adhered to at all time by the issuer.
Regular flow of information from the issuer to the
bondholders as well as prompt notification of any breaches
to the bond investors could help bond investors taking

immediate decision or action on its investments.

As bond defaults normally involved bond investors and issuer, authority
and regulatory bodies could play their roles in ensuring that the
restructuring or the recovery process are conducted within the regulations
and laws.
While the country is developing its bond market, the local market is still
lacking instruments or products which may help mitigate the default risk.
The absence of distressed bonds buyer or credit default swap market have
somewhat limited avenues for investors caught with problematic bonds.
However the creation of Danajamin, an institution providing guarantees to
certain lower rated papers, is a good step towards encouraging lower rated
companies to issue debt papers.
In more ways, bond investors will try their utmost to avoid defaults. If the
business is worth running in spite of the difficulties it is facing, bondholders
will consider finding ways to keep the company a going concern via
restructuring the bonds.
Defaults on the other hand, do not benefit anyone. Loss of investment, loss
of jobs, legal wrangling, cost of recovering are some of the result from
situations of default. While proper analysis and continuous monitoring of
the company can mitigate the risk, certain events may not be controllable
i.e. political issue, natural disaster etc. In the end it is up to the investors to
weigh in these factors during the investment decision process or risk going

through the recovery or restructuring process in the event of bond default.

--------------------------------------------------

Bondholder rights are protected under the Companies Act 1965 and
Securities Industry Act 1993.
Under the Companies Act, creditors, including bondholders, can file a
winding-up petition for a company when the debtor is unable to pay its
debts. When a winding-up order is made, the court appoints a liquidator
who oversees the liquidation process.
Foreign creditors have the same rights as local creditors under Malaysian
laws.
Under the Securities Industry Act (SIA), all bond issuers are required to
enter into a trust deed with an appointed trustee. The trust deed contains
bond provisions, covenants, and other requirements set by the Securities
Commission (SC). The trustee's role is to safeguard the interests of the
bondholders as set out in the trust deed and in the SIA.
Bond documents (e.g., prospectus, term sheets) also contain covenants
and relevant default clauses specific to the bond issue that provide
additional protection to bondholders. The SC's site provides copies of term
sheets and/or principal terms and conditions of bond issuances.

DANAJAMIN

Article 2: DANAJAMIN TO DIVERSIFY BOND, SUKUK MARKET

The Star, 23 February 2015

KUALA LUMPUR: Malaysia's Danajamin Nasional Bhd, the country's sole

specialised credit guarantor, plans to introduce partial guarantees to
encourage a wider range of issuers in the country's conventional and
Islamic bond markets, its top official said.
Malaysia is home to Asia's third largest bond market and has the world's
biggest market for sukuk, but deals are dominated by highly rated issuers.
Close to 90 percent of all bonds and sukuk are rated AA or AAA.
Set up in 2009 to help develop the domestic debt market, Danajamin has
provided guarantees for over 7 billion ringgit ($1.92 billion) of issuance, 45
percent of that amount in the form of sukuk.
The firm is one of a small but growing number of guarantors worldwide
which support sukuk deals.

Danajamin, owned by the finance ministry and Credit Guarantee Corp

Malaysia Bhd, now plans to expand its use of partial as well as temporary
credit guarantees, chief executive Mohamed Nazri Omar said in an
interview.
"If we guarantee every single issuance they'll all be rated triple A and there
will be no diversity. From a developmental angle, we want to deepen and
stretch the market with new products."

The move comes as Malaysia plans to remove mandatory credit ratings

from 2017, in an effort to reduce issuance costs and boost market volumes.
- Reuters
-----------------------------------Danajamin Nasional Berhad is Malaysias first and only Financial
Guarantee Insurer.
It were established in May 2009, to be a financial guarantor and a
catalyst to stimulate and further develop the Malaysian bond/sukuk
market.
During the Global Financial Crisis of 2007, investors in Malaysia were
spooked by the bond defaults in the US especially the Asset Based
Securities(ABS)/ bonds. set up Danajamin

 Danajamin provide financial guarantee insurance for bonds and

sukuk issuances to viable Malaysian companies to enable access to
the Private Debt Securities (PDS) market.
Jointly owned by Minister of Finance Incorporated (50%) and Credit
Guarantee Corporation Malaysia Berhad (50%), Danajamin is rated
AAA by both RAM Rating Services Bhd (RAM) and Malaysia Rating
Corporation (MARC). Credit Guarantee Corporation is a financial
institution majority owned by Bank Negara Malaysia.

Danajamin has total assets of RM1.9 billion and total shareholders

equity of RM1.2 billion as at 31 December 2013.
Danajamin is regulated and supervised by Bank Negara Malaysia under
the Financial Services Act 2013.
Danajamins key objectives are:
i. to provide financial guarantee to enable financially viable companies
access to the PDS market to obtain financing, with emphasis on longterm financing
ii. to catalyse the further development of the domestic PDS market as an
alternative source of financing to complement the banking industry
iii.to stimulate economic growth by improving access to capital for Malaysian
companies

Danajamin aims to:

facilitate a wider range of credit-worthy companies to raise capital via
the bond/sukuk market
encourage smaller/non-traditional issuers to raise capital via the
bond/sukuk market
provide availability of long-term capital for a wider range of
companies

Danajamin provides financial guarantee, a form of credit

enhancement, to bonds/sukuk.
Danajamins guarantee, the bonds/sukuk will be automatically
upgraded to AAA(fg), the highest rating accorded to bonds/sukuk.
With the improved rating, issuers will be more assured of a
successful bonds/sukuk issuance.
Investors, on the other hand, will have an opportunity to invest in
AAA-rated papers that are guaranteed by Danajamin.
Investors also have the assurance that Danajamin will pay the
principal and up to one coupon/profit (where applicable) on behalf of
the issuer, should the issuer fail to do so.

a. REGULATOR

Bank Negara Malaysia

b. SHAREHOLDERS

Ministry of Finance Inc (50%)

Credit Guarantee Corporation(50%)

c. Milestone:
i.
15 May 2009
ii.

Establishment of Danajamin
30 June 2009
Danajamin issues its Underwriting Policy which will serve as a in

iii.

evaluating applications for financial guarantee insurance

3 March 2010
Danajamin announces inaugural Guarantee Agreement to

iv.

guarantee RM250 million sukuk issuances

23 July 2010
Issuance of the first Danajamin Guaranteed Sukuk.
Issuer: LBS Bina Sdn Bhd

Key Features of Danajamins Financial Guarantee

Financial Guarantees are obligations from a AAA-rated government-owned
financial institution to investors.
The Financial Guarantees are unconditional and irrevocable.
Bonds/sukuk guaranteed by us are accorded a AAA(fg) rating by RAM
Rating Services Bhd/Malaysian Rating Corporation Bhd (MARC).
Danajamin will honour its contractual obligation to make good any
claims made, within 10 business days.
Risk Sharing
Danajamin advocate risk sharing with partner banks in transactions.
This allows for wider participation of banks hence making space for
maximum private sector involvement.
Investors can also take comfort in the fact that a transaction has obtained
clearance from more than one credit committee.
Risk Management
Danajami are a responsible risk manager regulated by Bank Negara
Malaysia, strictly adhering to regulations from all authorities.
This includes compliance to concentration limits, whether
transactional, group or sectorial in nature, for proper diversification at
regulatory determined levels.

 The risk management system and framework is robust and conforms

to international best practices.

Article 1:
The Star. 10 June 2014

Removal of mandatory ratings for bonds hailed

KUALA LUMPUR: The decision to remove mandatory ratings of bonds will spur the growth of
the Malaysian bond and sukuk markets and provide investors with greater investment choice,
industry players say.

These are exciting times for the Malaysian capital market. We continue to stress the need for
investors to do their homework on companies before investing, but also, there will be greater
opportunities for investors and corporations to capitalise on greater liquidity and market
participation, Aberdeen Asset Management Sdn Bhd said in an email reply to StarBiz.
CIMB Group chief executive Datuk Seri Nazir Razak said allowing companies to issue bonds
without credit rating requirement was the normal standard in more-developed markets.
I think Malaysia is ready to get there, he said on the sidelines of the Invest Malaysia 2014
conference.
He added that without the requirement for credit ratings, the cost of issuing bonds would be
reduced.
However, Nazir said credit ratings were still relevant for issuers to benchmark their debt against
international standards.
Companies at the very high end will get away without a rating but those who are not will still
need the rating, he said.
AirAsia group CEO Tan Sri Tony Fernandes said many companies would benefit from the new
measures. Because getting a rating is expensive. Anything that makes business easier is a
good thing, he told reporters.
Lenders will come to evaluate your books anyway and identify the risk profile. They will price
the debt accordingly, he added.
Maybank Investment Bank chief executive officer John Chong said the measures were a
positive development for the Malaysian capital market and were aligned with international
markets, which had long allowed the issuance and tradability of unrated bonds and sukuk.
He said the move would, among others, reduce issuance cost and broaden the spectrum of
investible fixed income instruments in the market place.
We view these measures as a positive signal from the government in its move towards
liberalisation and allowing competition, which will ultimately lead to a more efficient and deeper
capital market.

They are very much in line with the broad objectives of the Capital Markets Masterplan 2
announced in April 2011, he added.
The removal of the mandatory requirement for corporate bond credit ratings by Jan 1, 2017 was
announced by Prime Minister Datuk Seri Najib Tun Razak yesterday.
Najib said international credit rating agencies with full foreign ownership would be allowed to
operate in Malaysia from January 2017.
The initiatives, Najib explained, were part of the Governments strategy to liberalise the
countrys financial market.
But with the removal of mandatory bond ratings, issuers will now have to be more transparent
and investors will have to get sufficient access to information.
Accessibility to information is necessary for investors to do their own credit assessment, Bond
Pricing Agency Malaysia Sdn Bhd CEO Meor Amri Meor Ayob said.
He added that a new framework necessitating greater transparency and availability of corporate
information of bond and sukuk issuers should be implemented to facilitate investment decision
making.

Tutorial 3: BONDS
1. Weekly Review.
2. i. Discuss the events which led to the establishment of Danajamin.
ii. Discuss the contribution of Danajamin to the Malaysian Capital
market.

3. Refer to Article 1: Come Jan 1 2017, Malaysia will open its doors to
international credit rating agencies to operate in Malaysia. Discuss
the implication of this action to the Bond market.
4. Discuss the course of action available to an investor in case of a
bond default.