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| Danajamin fills void left by banks |
| Written by Tony C H Goh | |||
| Monday, 01 June 2009 00:00 | |||
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Banks, taking stock of the bitter lesson of failed guarantees, have since stayed away from this segment of financing. Given this scenario, the arrival of Danajamin Nasional Bhd has generally been well received, given the deterioration in the quality of outstanding bonds and rising risk environment. As of March this year, a total of 15% of rated issuers have been given a negative outlook rating as the country enters a recession. Although many agree that the default rate will not reach the high of 8.79% seen in 1998, the likelihood of defaults in the long run can be significantly reduced by having a bond guarantee. Rating Agency Malaysia Bhd (RAM) foresees the default rate among bond issuers to increase to 1.8% this year, up from 1.05% in 2008. In a worse case scenario, it predicts a rate of 4.8%. Against this backdrop, Danajamin’s chairman Datuk Seri Abdul Hamidy Hafiz says it is there to fill the void left by the financial institutions. “One of the main objectives is, of course, to provide a platform for companies, especially smaller ones with little track record but viable businesses, to enjoy long-term financing at a reasonable rate. But we are also here to fill the void left by financial institutions and thus increase competition in the financial market,” he says. Danajamin is a government initiative to revitalise the bond market and to ease access to funds by companies. It is 50% owned by Bank Negara Malaysia, with the balance owned by the Ministry of Finance, which inherently gives any paper the latter guarantees a triple-A rating. It operates as a guarantor, charging premiums for guaranteeing bonds issued by companies. Companies that will otherwise obtain a single “A” rating that cost up to 9% to issue, will now qualify for an “AAA” rating, for which the cost is less than 5% once it is guaranteed by Danajamin. Danajamin makes money by charging the issuer a premium for the guarantee it provides. Will Danajamin make money or lose money? The sceptics are already pointing out that the bank guarantee will only be given to connected companies. Hamidy emphasises that Danajamin is not entirely profit-oriented but neither does it expect to lose money. “We are here to serve the government’s objectives, with the focus on helping corporations involved in a wide spectrum of industries, although priority will be on infrastructure and other high multiplier projects,” he explains. Infrastructure and utility firms constitute about 25.6% of the total bonds issued at end-2008, significantly higher than the 4.3% during the Asian financial crisis, as the government stepped up spending on public works to spur the economy. The financial services sector remains the largest issuer, making up 30.8% of the total bonds issued last year, compared with 41.3% during the financial crisis in 1997/98. Total bonds outstanding in the market are believed to be in excess of RM200 billion in 2008. According to RAM, corporations — especially those in industries, manufacturing and services sectors — tend to operate in a less regulated environment, and hence are vulnerable to the dynamics of the market and rating adjustments. Hamidy says companies seeking Danajamin’s guarantee are investment grade, and will have to go through multiple layers of tests before a guarantee is underwritten. Companies that issue bonds guaranteed by Danajamin will be subjected to stringent oversight and constant monitoring by the latter, including the right to conduct an independent audit if warranted. While pointing out that Danajamin is not in the business of running companies, Hamidy does not discount the possibility that it might take over a company under its watch if necessary. “The main thing is ensuring they perform according to what they have submitted to us in their business plan... this is important as we are dealing with public funds, for which we have to be accountable,” says Hamidy. Companies that initially have difficulties accessing the bond market would be able to prove their worth with a Danajamin guarantee and subsequently, with a proven track record, would have easier access to debt financing, he adds. Effectively, Danajamin’s existence is also in response to the perceived inefficiency of bond trustees in safeguarding the interest of bondholders. Siew Suet Ming, RAM’s head of structured finance ratings, however, opines that rating agencies could help by alerting bondholders of possible defaults, and that their roles have not changed. In fact, they have increased their monitoring in light of the rising risk environment. Total new private debt securities in 2008 declined by 28.1% to RM49.7 billion, mainly due to a sharp fall in the second half of the year after a strong performance in the first half. Danajamin is hoping to provide an alternative for investors by improving liquidity in the bond market. “There is still a lot of liquidity in the market, and there is also no shortage of suppliers of bonds. The only questions are the timing on the part of issuers and obtaining the right yield for investors,” says Siew. On how the entity expects to survive the evolving financial market, Hamidy says Danajamin may play different roles as the financial market continues to evolve. The current lacklustre market conditions is not going to last forever but Danajamin will still be around, he says. This article appeared in the Corporate page of The Edge Malaysia, Issue 757, June 1-7, 2009.
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