|Nazri: Things have changed since the peak of the 2008/09 global financial crisis. Investors are now demanding AA2 and A1 paper when previously they would not even consider AA2 paper.|
WITH investors willing to take risks now, Danajamin Nasional Bhd — the country’s financial guarantor that was established in 2009 after the global financial crisis, when risk-taking was probably at its lowest — is evolving with the times.
“Things have changed since the peak of the 2008/09 global financial crisis. Investors are now demanding AA2 and A1 paper when previously they would not even consider AA2 paper,” its CEO Mohamed Nazri Omar tells The Edge.
Nazri, who had joined Danajamin in 2012, was appointed its CEO in May this year.
Danajamin’s job is to guarantee the bonds and sukuk of corporates that have low ratings so that the issues are successful. Bonds issued under its guarantee are bumped up to AAA rating, thus lowering the risk of potential default.
However, there are those who say that given the need to create depth in the local bond market, Danajamin’s guarantee for lower-rated bonds, usually single A-rated, leaves the market with little single A-rated paper with high yields compared with AAA-rated paper.
Nazri acknowledges this, remarking that this is also the feedback from Danajamin’s stakeholders. He says the financial guarantor is exploring other ways of providing companies with credit enhancement without wrapping up all the high-yield bonds that seem to be in demand these days.
“If the market can take it and if the pricing makes sense, then why not [explore options to allow credit enhancement for companies to tap the debt market, but perhaps not at the AAA level]? There are various permutations for this. It can be done through structuring, for example, a senior and junior tranche, subordinated structures, among others. We’re exploring them.”
In 2012, Danajamin guaranteed its first subordinated bond that was issued by Mecuro Properties Sdn Bhd, a subsidiary of Boustead Holdings Bhd. It guaranteed tranches of bonds amounting to RM419 million with a maturity of 7 to 8½ years.
“The banker [for Mecuro Properties] did a multi-tranche securitisation. It had AAA bonds on a standalone basis, AA2 and A1 bonds. It also had A- and BBB bonds but we were happy with the asset risk. We wrapped that instead. We look for these kinds of opportunities,” says Nazri.
“Moving forward, we will look for this kind of permutations. A lot of investors want high yields but we don’t know if they can take up everything. Multiple tranches will allow the issuer to have both high-yield and AAA-rated bonds.”
Since 2011, Danajamin has also morphed from being the sole guarantor for bonds and sukuk to being a co-guarantor with banks. Risk-sharing, Nazri opines, is the best way for Danajamin going forward.
The company benefits from risk-sharing as it frees up capital for other transactions that it may undertake. Nazri says risk-sharing also provides investors with the assurance that transactions guaranteed by Danajamin have similarly been approved by the credit committees of banks. This gives investors commercial validation of the deals made.
“We complement the banks because they are unable to undertake some of the deals themselves. They may need our help in terms of assisting them to raise a bigger amount of capital for the client or stretching the tenure,” Nazri points out.
Danajamin has seen a slowdown in the number of corporates tapping the debt market, possibly due to the lacklustre global economic conditions. This year, the company has so far guaranteed only one bond amounting to RM170 million, according to its website.
Nonetheless, Nazri says there have been more applications from the infrastructure industry that require longer tenure. Typically, Danajamin receives about 10 applications a year.
Nazri says the company has now taken a proactive stance on sourcing for potential clients. However, he assures that the financial guarantor will not jeopardise credit quality for the sake of portfolio growth.
Since it was set up, Danajamin has guaranteed some RM6.9 billion worth of bonds and sukuk, of which RM5.7 billion is outstanding in the market.
On rumours that the company has seen a high turnover of staff in the last two years, Nazri says this is due to the dynamic nature of the industry. He adds that the turnover rate is comparable to that of other financial institutions.
“As Malaysia’s leading financial guarantee insurer, we provide a unique opportunity to our employees to gain exposure to various aspects of the capital market. Danajamin promises all newcomers a journey of professional development.”
In fact, in its financial year 2013, the company invested about 12% of its annual staff cost in professional development. This is above the industry average of 2.5% to 3.5%, Nazri points out.
For its first six months ended June 30, Danajamin’s gross earned premiums amounted to RM47.75 million while its interest income was RM25.06 million, representing 52% of the gross earned premiums.
While Danajamin’s business model is to generate earnings from guarantee fees, Nazri says the sheer size of its capital — at RM1 billion — also means that it generates a significant amount of interest income. “We want to ensure the capital is generating some income. It’s also a way to build up reserves and shareholders’ funds.”
Nazri, who has been in the financial sector for 17 years, believes Malaysia’s debt market is one of the deepest and broadest around. He says the vibrancy of the market can be enhanced through the issuance of bonds with longer tenures, given the emergence of longer concessions.
The market will also benefit from the same level of vibrancy found in the long-term fundraising platform cascading to the lower-rated issuances, particularly the single A-rated, he adds.
This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.