Capital Market: Debt*

IntroductionWhat is a bond market?How does the bond market promote the economic development process of a country?

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The Malaysian Bond MarketStarted in 1970sRaise funds for countrys development projectsBond issuers started with the Govt and later mostly by the private sectorDuring 1980s main source of financingAfter the 1997-98 Asian financial crisis, there had been a conscious shifts towards the bond market. Why?

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Why we need a strong bond market:Investors demand large amount of financeThe shift from labour intensive to capital intensive industries demands long-term debt financingLong-term institutional investors need funds for portfolio diversification and asset liability management purposes

The Malaysian Bond Market*

Who are the Issuers in the Malaysian Bond Market?Government of MalaysiaTo finance working capital and development expenditureHow? By issuing diverse forms of govt securitiesMalaysian Treasury Bills (short term) working capitalInterest-bearing long-term bonds development expenditureNon-interest bearing securities based on Islamic principlesGovernment Investment IssueMalaysian Islamic Treasury Bills

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Bank Negara Malaysia (Central Bank)Issue bonds to manage liquidity in both conventional and Islamic financial marketsAllowed to purchase Malaysian Government Securities (MGS) from the primary and secondary markets and used them for its open market operations. What is open market operation?

*Who are the Issuers in the Malaysian Bond Market?

Securities issued by Bank Negara:Bank Negara Monetary NotesDiscounted or coupon bearing govt securities with maturity of 91,182, 364 days and 1-3 yearsTo manage liquidityReplaced BNM Bills and BNM Negotiable Notes by Dec 2006Offered through competitive auctionSukuk BNM IssuesZero coupon bonds with maturities 1-2 yearsBased on Ijarah (sale and lease concept)Merdeka Savings BondsTargeted at retireesBased on Islamic banking concept of Bai Al-Inah (sell and buy back arrangement)

*Who are the Issuers in the Malaysian Bond Market?

Quasi-government Institutions

Khazanah Nasional BerhadEmpowered as the governments strategic investor and trustee to the nations financial assetsTo promote economic growth and make strategic investments on behalf of the govt which would contribute towards nation buildingSelect strategic industries and nurture their development through the issuance of zero coupon Khazanah Bonds (based on Islamic principle with maturities of 3, 5, 7 or 10 years) guaranteed by the govt

*Who are the Issuers in the Malaysian Bond Market?

Pegurusan Danaharta Nasional BerhadA public company incorporated under the Companies Act 1965Wholly owned by the Malaysian Govt.To act as the national asset management companyIts principal objectives are to re-energize the Malaysian financial sector by buying non-performing loans (NPLs) and maximize their recovery valueHas a special power to acquire, manage and dispose of NPLs and assets

*Who are the Issuers in the Malaysian Bond Market?

DanamodalA special purpose company incorporated by BNM in 1998To recapitalize and strengthen Malaysias banking institutions and promote stability in the local banking industryto ensure that the banking sector continues to be a lending conduit to corporations and individuals

*Who are the Issuers in the Malaysian Bond Market?

Cagamas Berhad (National Mortgage Corporation)Established in 1986The leading securitization houseSecuritizationis the process of taking an illiquid asset, orgroup of assets, and through financial engineering, transforming them into a security.Promote the secondary mortgage market in MalaysiaIssues debt securities to finance its portfolio of loans and debts purchase for its housing loans, industrial property loans, hire purchase and leasing debts, Islamic house financing and hire purchase debts

*Who are the Issuers in the Malaysian Bond Market?

Cagamas debt securities include:Cagamas Fixed Rate Bonds1 -10 years, fixed coupon rateCagamas Floating Rate BondsUp to 10 years with adjustable interest rate pegged to 3-month or 6-month KLIBOR rateCagamas NotesShort-term with 1-12 monthsIssued at discountSanadat Mudharabah CagamasIslamic bonds based on profit sharing arrangement

*Who are the Issuers in the Malaysian Bond Market?

Multilateral Development BanksRefer to World Bank Group, five regional development banks, the Global Environment Facility and the International Fund for Agricultural DevelopmentTheir objective is to provide financial support and professional advice to the developing countries in terms of economic and social development activitiesTheir sources of funds:Borrow from international capital markets and re-lend to the govts of developing countries and charge market interest ratesLend donated money and charge low interest rates

*Who are the Issuers in the Malaysian Bond Market?

*Investors in the Malaysian Bond MarketEmployees Provident FundPension FundsUnit TrustsInsurance CompaniesAsset management companiesDiscount housesCommercial banksIslamic banksInvestment banksSecurities companiesFinance companies

Debt Securities ProductsTypes of Government SecuritiesMalaysian Treasury BillsTo finance short-term capital requirementsIssued at discount through competitive auction facilitated by BNM. So, the return?3-months, 6-months, 1 yearActively traded in the secondary marketMalaysian Islamic Treasury BillsShort-termMalaysian Government SecuritiesBorrowings of the Govt.To finance long-term development projectFixed rate coupon bearing bonds, coupon payment made semi-annuallyIssued by auction and by subscription, can be bought in the secondary market and from BNMTenure of 3-20 years

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Government Investment IssuesLong-term non-interest bearing government securities based on Islamic principles to finance developmental expenditureIssued through competitive auction by BNMBased on BaiAl-Inah principle where the Govt will sell a specified nominal value of its asset and subsequently will buy back the assets at the nominal value plus profit through a tender processThe profit rate will be distributed on a half-yearly basisMaturities of 3, 5, 7 and 10 years

*Debt Securities Products

Corporate BondsFixed Coupon Bearing BondsStraight bondsFixed coupon rate, tend to carry high interest ratesBonds with detachable warrantsWhat Does Detachable Warrant Mean?Aderivative that is attached to a securityand gives the holder the right to purchase an underlying security at a specific price within a certain time frame.A detachable warrant isoften combined withvarious forms of debt offerings and can be removed by the holder andsold in the secondary market separately. Detachable WarrantMany companieschoose detachable warrants when issuing bonds because itmakes a debt offering more attractiveand can be an effective methodof raising new capital. The exposure to the right given by the detachable warrant can oftengain the attention of investors who do not usually participate in the fixed-income markets.A detachable warrantcan be traded independently of the package with which it was offered,andis similar to acall option.

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FloatersInterests are tied to some measure of current ratesZero coupon bondsNo periodic coupons are paidSold at discountAsset-backed securitiesSecurities backed by assets such as mortgagesConvertible bondsGive the holder the right to convert the bond into a specified number of sharesLower coupon rateCallable bondsThe issuers have the right to call back the bonds before maturity

*Corporate Bonds

Bond Pricing AgenciesWhat is the purpose of having a rating?The rating agencies are independent from bond issuing companies.Focus on credit analysis of issuing companiesRating Agency Malaysia Berhad (RAM) established in 1990 and Malaysian Rating Corporation Berhad (MARC) established in 1996

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Rating Agency Malaysia Berhad (RAM)Provides independent credit research and advisory services to its customersHelp in decision makingProvides financial and credit expertise through training as well as economic researchRefer from RAMs website for the bond rating definitions

*Bond Pricing Agencies

Malaysian Rating Corporation BerhadProvides ratings and comprehensive research servicesRefer to MARCs website for the MARCs long-term ratings and short-term ratings

*Bond Pricing Agencies

Standard & PoorsA global and independent rating agency that provides credit ratings and credit risk analysisMoodysInvolves in credit ratings, research and risk analysis

Credit ratings and research help investors analyze the credit risks associated with fixed income securities

*Bond Pricing Agencies