This article first appeared in The Edge Financial Daily on September 3, 2019

KUALA LUMPUR: To ensure the Malaysian economy could continue to grow holistically, Danajamin Nasional Bhd is broadening its role in accordance to market needs.

Danajamin was established in 2009 in the midst of the global financial crisis to be a financial guarantor for bond issuances, allowing the debt papers to command stronger ratings to entice take-up from investors in order to help companies that are facing challenges to tap into the debt market. By the same token, Danajamin has also helped drive the domestic bond market.

After 10 years in existence, Danajamin has recently introduced a new financial service under its belt: financing guarantee insurance for financing facilities. This service basically means that Danajamin is providing protection to lending institutions against the risk of loss by default by borrowing entities. In its pilot phase, this service is focusing on term loan facilities only.

“So if you think of the concept of bonds, the market needs a guarantor because some of the issuers may not command enough market confidence in their bonds, so this is why we serve them.

“The same goes to mid-sized corporates, they also need to raise financing. Similarly, bankers also need some confidence in giving them financing. And because the amount [of financing required] is not so big, they don’t need to issue bonds, instead, they do term loans.

“This is where Danajamin comes in — as the guarantor for mid-sized corporations in raising financing through term loans,” Danajamin chief executive officer Mohamed Nazri Omar told The Edge Financial Daily in an exclusive interview. To illustrate, Mohamed Nazri said that Danajamin may suggest a large corporation that requires a RM3 billion financing to issue bond, but a mid-sized company that requires a RM300 million financing may only raise the amount through a term loan.

Mohamed Nazri highlighted that it is important to cater to the needs of mid-sized corporations to ensure a well-diversified growth in the domestic economy. As this segment is often overlooked by banks, Danajamin sees an opportunity for it to come in.

“Our target market is the mid-sized companies. I think it (the market) will continue to grow. The market needs a well-diversified growth, it cannot just be the big boys who are growing and become huge conglomerates, and then the rest is nowhere.

“So even though the economy is growing, there are some pockets of industries that need some help,” Mohamed Nazri said.

According to Mohamed Nazri, there is no difference in the risk profile of its clients that approach Danajamin for guarantee in bond issuance or raising financing through loans. In fact, whether a proposal is for bond issuance or term loan financing, he explained, any new application will go through the same stringent credit evaluation process — supported by its risk management framework — to assess the viability of the said transaction.

“Once the client is onboarded, Danajamin will continue to undergo rigorous monitoring throughout the tenor of the guarantee,” he added.

Mohamed Nazri stressed that Danajamin only provides guarantee to companies that are bankable in the first place, in which business feasibility is the most important component of all its assessments.

As a matter of fact, there may be a number of reasons why these companies are unable to obtain commercial funding on a standalone basis. For instance, it can be a result of the financial institution being constrained by its internal single customer limit, sectoral concentration limit or limit on the tenure.

Other reasons include companies operating in cyclical industries, such as oil and gas, steel and plantation, which may not be priority sectors for some banks during an industry downcycle.

“This may affect even established companies which have reputable track records,” Mohamed Nazri added. Mohamed Nazri was quick to deny that there is less appetite for bond issuance in the current market, especially when the market is having a low interest rate environment.

Instead, he acknowledged that there are more options to raise financing now rather than going into the debt capital market. So Danajamin needs to be agile to cater to the new financing options.

“You seem to see [fewer] bonds (available in the market). But it is not because people who buy bonds suddenly do not want bonds. There is a lack of issuance — not a lack of demand — which goes back to the needs of the market,” he explained. However, given that the new government has approved several mega-infrastructure projects, Mohamed Nazri sees bond issuances may start to pick up towards the end of this year.

In the financial year ended Dec 31, 2018 (FY18) Danajamin booked a net profit of RM119.20 million, up 4.4% from RM114.19 million in the previous year.

This was attributed primarily to its higher investment income of RM94.5 million, compared to RM71.7 million in FY17, which was supported by Danajamin’s shift towards higher-yielding securities, a larger investment portfolio as well as the higher domestic interest rate environment in 2018. Retained earnings was 17.6% higher at RM761.87 million compared to RM647.73 million as at end FY17.

Danajamin is currently mostly exposed to the real estate and property development sector, and power sector, with 20.5% and 17.2% respectively of its total net outstanding guarantee amount. These are followed by construction and building materials (16.9%), toll roads and highways (13.9%) as well as oil and gas related activities (13.9%).

Its top two guaranteed companies are NUR Power Sdn Bhd and Ranhill Powertron II Sdn Bhd, both in the power sector, with a total net exposure of RM735 million.

As at Dec 31, 2018, Danajamin had total assets of RM2.7 billion.