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Developing Corporate Bond Market
Asia-Pacific Finance and Development Center, Shanghai

Role of Credit Rating Agencies and their Development - The Malaysian Experience

27 November 2006

ƒ Key Components of Bond Market ƒ Role of Credit Rating Agencies (CRAs) ƒ Evolution of the Malaysian Bond Market ƒ Current Initiatives ƒ The Way Forward




Key Components of Bond Market
Macro Environment
9 Stable macro economic and political environment 9 Economic growth must be strong enough to generate appropriate issuers and investors 9 Benign inflation and stable (nonvolatile) interest rates environment 9 Relatively high savings and investment rates 9 Broad issuers and investors base

Regulatory Supports
9 Strong government drive 9 Established legal framework 9 Supportive regulatory framework 9 Tax related to bonds must be at least comparable to other fundings

Institutional Supports
9 Reliable and cost effective trading and settlement systems 9 High quality, independent and credible CRAs 9 Transparent and efficient pricing mechanism 9 Financial guarantee insurace

Product Base
9 Cost efficient risk hedging mechanisms 9 Wide range of instruments

Regulators Accountants Investors Lawyers Issuers

ƒ A well-functioning bond market involves various stakeholders ƒ CRAs is only one component, albeit an important on


Pricing Agency

Rating Agencies Tax Advisors


Trading & Settlement Hedge providers

ƒ However, having CRAs alone will not result in a vibrant bond market…


Key Components of Bond Market
Members of AssociationRating of Credit Rating Agencies in Asia (ACRAA) Country Agency Bangladesh

ƒ More than 50 CRAs globally, mostly domestic CRAs ƒ Big-3 International CRAs ƒ ACRAA has 24 member domestic CRAs ƒ Most Asian countries have more than one domestic CRAs

ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ

Credit Rating Agency of Bangladesh Limited (CRAB) Credit Rating Information & Services Limited (CRISL) Dagong Global Credit Rating Co. Ltd Shanghai Far East Credit Rating Co. Ltd PEFINDO Credit Rating Indonesia PT Kasnic Credit Rating Indonesia Credit Analysis and Research Ltd (CARE) CRISIL Limited ICRA Limited Japan Credit Rating Agency Limited (JCR) Islamic International Rating Agency Korea Investors Service Inc. Korea Rating Corporation Seoul Credit Rating & Information Inc. (SCRI) National Information & Credit Evaluation Inc. Rating Agency Malaysia Berhad (RAM) Malaysia Rating Corporation Berhad (MARC) Philippine Rating Services Corporation (PhilRatings) JCR-VIS Credit Rating Co. Limited Pakistan Credit Rating Agency (Pvt) Ltd (PACRA) Lanka Rating Agency limited (LRA) Taiwan Ratings Corp (TRC) TRIS Rating Co. Limited Ahbor Rating

China Indonesia India

Japan Kingdom of Bahrain Korea

Malaysia Philippines Pakistan Sri Lanka Taiwan Thailand Uzbekistan Source: www.acraa.com




Role of CRAs
9 Investor protection via independent, 3rd party opinion on the credit risk or default risk of issuers/issues 9 Distill complex financial structures into user-friendly symbols 9 Provide a common yardstick to evaluate default risk for investment decision making 9 Monitor and disseminate credit opinions on rated issuers/issues in a timely and efficient manner 9 Bridge the information gap between issuers and investors and a source of credit surveillance for investors 9 Assist regulatory authorities in developing and facilitate implementation of prudential guidelines requirements e.g. BASLE II


Role of CRAs
9 Provide a performance benchmark - 3rd party evaluation of company’s business and financial performance within and across industries 9 Tracks and monitor performance of economy/industries, as well as default statistics 9 As a catalyst for bond market development 9 Help enlarge investor pool 9 Improve capital allocation efficiency 9 Lower funding cost for issuers 9 Foster product innovations




Development of CRAs
In line with Nation’s Aspirations Supporting Regulators Market Catalyst

Lower Costs for Domestic Issuers

Home Grown Expertise

Alternative Voice to International Views Familiarity with Local Market

Relevant Methodology


Key ingredients to successful development of CRAs… ƒ Strong regulatory supports – e.g. mandatory rating requirement, government support to the bond market ƒ Financial viability – for the CRAs to attract and retain talents and maintain objectivity ƒ Strong and supportive shareholders – remove pressure for the CRA to provide returns to shareholders; also to provide financial support if necessary ƒ Independence – independent BODs and management, no interference from shareholders, government

‰ Objectivity ‰ Independence ‰ Transparency ‰ Credibility & Track record ‰ Resources ‰ Recognition

Multi-layered rating process, IOSCO Codes of Conduct Shareholding structure Disclosure of rating methodologies, processes Built up over time; culminated in default study R&D; Human capital; Training Mandatory ratings


Development Perspectives – Economic Trends
20.0 15.0 % per annum 10.0 5.0 0.0 R





Unemployment rate CPI -5.0


Development thrust Structural change

Export-oriented light manufacturing – textiles, electronics Agri – 28.4% GDP Manu – 11.8% Cons – 4.1% Serv – 44.1% Min – 11.6% Real GDP – 7.8% p.a. CPI – 5.8% p.a. Pop – 10.9 million Per cap income – USD319

Heavy industry import Value-added export Services – ICT, substitution – cars, manufacturing – tourism, education, iron & steel, oil & gas electronics, machineries health Agri – 22.6% GDP Manu – 19.4% Cons – 4.6% Serv – 39.5% Min – 9.9% Real GDP – 6.0% p.a. CPI – 3.7% p.a. Pop – 13.9 million Per cap income – USD1,779 Agri – 16.3% GDP Manu – 24.6% Cons – 3.5% Serv – 46.8% Min – 9.4% Real GDP – 7.2% p.a. CPI – 3.7% p.a. Pop – 18.1 million Per cap income – USD2,467 Agri – 8.9% GDP Manu – 31.9% Cons – 3.3% Serv – 53.9% Min – 7.3% Real GDP – 4.2% p.a. CPI – 1.5% p.a. Pop – 23.3 million Per cap income – USD3,915

Economic Progress

Evolution of the Malaysian Bond Market
140% 120% 100% 80% 60% 40% 20% 0%

% of GDP

Savings/GDP Investment/GDP

1970s 1970 Financing trends
FDI – RM0.3bn; 2.5% GDP Bank loans – RM2.6 bn; 22% GDP Mkt Cap – neg. Govt bonds – RM7bn, 0.6% GDP Corp bonds - nil

1980s 1990



FDI – RM6 bn; 5.4% GDP Banks – RM114 bn; 103% GDP Mkt Cap – RM132 bn; 111% GDP Govt bonds – RM62bn; 41% GDP Corp bonds – RM3bn; 2% GDP FDI – RM14 bn; 4.2% GDP Banks – RM454 bn; 132% GDP Mkt Cap –RM444 bn; 129% GDP Govt bonds – RM89 bn; 26% GDP Corp bonds – RM101bn; 21% GDP


FDI – RM2 bn; 4.0% GDP Banks – RM26 bn; 30.7% GDP Mkt Cap –RM43 bn; 84.8% GDP Govt Bonds – RM17.6, 32.7% GDP Corp Bonds - <1% nom GDP


Mandatory Ratings RAM created Requirement 2nd CRA formed

Financial Sector Master Plan Capital Market Master Plan ABS Guidelines Bond Pricing Agency Guidelines Credit Rating Agency Guidelines

Initial PDS Guidelines by Central Bank

SC created

National Bond Market Committee Supranational PDS Guidelines Bonds Guidelines


Evolution of the Malaysian Bond Market

RM' 000

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1995 1996 1997 1998 1999 2000 2001 2002 1990 1991 1992 1993 1994 2003 2004 2005 2006 (Sep)

CAGR (1990-2005) = 20.4% p.a.

Islamic Bonds *

Conventional Bonds

Islamic Debt represents 49% of total private debt securities outstanding as at June 2006
Conventional ABS 6%
New Sukuk Issues represented 62% of all new corporate bond issues (as at June 2006)

Loan Stocks 7% Islamic CP / MTN 14% Conventional CP / MTN 7% Islamic Bonds 33%

Islamic ABS 2% Conventional Bonds 31%

Total outstanding value = RM193 billion As at end-June 2006 Source: BNM


Increasing product diversity through Asset Securitisation…

2001 CBO, CLO 2002 CMBS 2003 Auto ABS 2004 RMBS, Charge Card Receivables 2005 Plantation ABS, Islamic RMBS, REITs

B O N D S IS S U A N C E : C o r p o r a te a n d A B S
4 5 ,0 0 0 4 0 ,0 0 0 3 5 ,0 0 0 3 0 ,0 0 0 2 5 ,0 0 0 2 0 ,0 0 0 1 5 ,0 0 0 1 0 ,0 0 0 5 ,0 0 0 0 1993 1997 1999 2000 2001 2002 2003 2004 1990 1991 1992 1994 1996 1995 1998 2005 2006 (Sep)

RM ' 000

C o rpo ra t e B o nd s ABS

Regulatory Drive
RAM-driven study in 1993 was instrumental in laying the ground work for development of the bond market Identified needs, impediments and legal requirements… ƒ Regulatory Drive – BNM (Central Bank), SC ƒ Supportive Government Initiatives ƒ Establishment of Critical Institutions ƒ Response to Market Needs
Ð Supply of long term funds from EPF and Insurance Companies that matched the demand for large scale fixed rate funding for long tenures (infrastructure /utilities) Ð Demand for different types of debt instruments (Plain Vanilla Bonds, Islamic Debt Instruments, Bank Subordinated Debt, ABS and other Structured Products)

Supportive Government Initiatives


Critical Institutions
ƒ Mandatory rating requirement since 1993 ƒ Privatisation – shift from direct government investment/funding to the private sector ƒ Set up Cagamas – the National Mortgage Corporation to provide secondary market for housing loans and liquidity to the banking system ƒ Bonds were used as part of the Government led corporate and bank debt restructuring programmes in 1998 during the Economic Crisis in tandem with the establishment of Danaharta, Danamodal and CDRC ƒ National Bond Market Committee, NBMC (comprising MOF/BNM/SC with input from RAM) was established in 1999 to provide recommendations on market development ƒ Asset Securitisation Consultative Committee, ASCC (led by SC) in 2000 to drive development of asset securitisation

Critical Institutions
ƒ Domestic CRAs – RAM was mooted by Bank Negara Malaysia to serve as catalyst for the Bond Market via :
Ð Investor Protection / Transparency that ratings provide Ð Training services to create the necessary expertise Ð Conferences to increase awareness and credit rating culture Ð Involvement in NBMC and ASCC Ð Publications: Rationales, Bond Newsletters, Islamic Articles

ƒ Employees Provident Fund (EPF) and various Government Funds
Ð A major investor in PDS
EPF’s investment was RM94.35 billion in 2005 (36% of total investments)

ƒ Mutual Funds / Private Sector Funds
Ð Growing affluence & high savings rate allows individuals to invest in the bond market indirectly

Sectorial Distribution of Corporate Bonds 1991 – Mar 2006
Total rated value = RM304 billion
Fig includes matured issues Div hldg 9% Fin services 8% Plant/Agri 1% Cons prod 2% ABS 8% Indust prod 6% Infra/Utilities 41%

Const & engin 4% Trdg/Serv 2% Transp 6% Prop/R_estate 11%

Toll Roads, Independent Power Producers and Telecommunications Providers required a

large scale fixed rate long term financing – a need fulfilled by the bond market

Bond Market Development Outcome - One of the largest bond markets in the region

As a proportion of GDP – Malaysia’s Bond Market (Government and Corporate) is the LARGEST compared to the other countries in the region (ex-Japan)

Bond Market Development Outcome - Bond market significant financing mode in Malaysia
Malaysia has one of the largest corporate bond markets in Asia ex-Japan : USD71.9 billion as at end-2005

The Way Forward
ƒ Central Bank (BNM) and SC working hand-in-hand to create an International Islamic Capital/Banking Hub – the bond market features as a key component.
Ð Corporate Sukuk market has grown to about half the total outstanding PDS market Ð RAM is working with BNM / INCEIF / IFSB to provide training services to create the necessary expertise in banks and to promote the creation of globally accepted Islamic Products

ƒ Bond Pricing Agency(“BPA”)
Ð RAM initiated Bondweb Malaysia to create greater transparency in pricing Ð Move to create a regional BPA to support the Proposed Asian Bond Market

ƒ Bolstering Risk Management Architecture / Culture
Ð CRAs expanding role to that of an ECAI Ð RAM’s expertise in the Corporate Debt Restructuring Committee during the crisis is now being leveraged to provide risk consulting and BASLE II advisory via RAM Consultancy (a wholly-owned independent subsidiary)

Current Initiatives
The domestic bond market is a crucial component of a country’s financial deepening & risk diversification. It is essential therefore for domestic CRAs to play a developmental role in tandem with its market role. ƒ Liberalisation
Ð As part of skills upgrading and to obtain international market exposure domestic CRAs are forming alliances / affiliations with international rating agencies [for instance, RAM is affiliated to S&P] Ð Supranational bonds (e.g. ADB Bonds issued in Malaysia) is the 1st phase to drive further liberalisation and to encourage foreign participation

ƒ Encourage Regionalisation
Ð Inter-regional regulator /CRA cooperation - ACRAA Ð Asian Bond Market Initiatives – harmonisation of rating criteria/standards Ð Bridging the information gap through bond pricing agencies

Lessons from the Malaysian Experience - Regional Initiatives and Opportunities
• ADB – Asian Bond Funds • Asean – investment in infrastructure development, tourism, growth triangles

• Removal of impediments to investment • Transparent and supportive rules & regulations • Clear administrative processes and procedures

PRIVATE SECTOR • Information aggregators and providers
• • • • • • Bond pricing agencies Credit rating agencies Financial guarantor institutions Credit bureaus Export Credit Agencies Market research companies

ƒ Government acts as a strong facilitator to establish the legal and regulatory framework ƒ Domestic CRAs as a catalyst ƒ Educate the banking sector that the bond market is complementary to the loan financing and not a threat ƒ Inter-governmental agency / regulators coordination essential ƒ Mobilise pension / insurance funds to fuel the bond market ƒ Adopt international best practices at early stage while taking into consideration domestic needs ƒ Asian Financial Crisis reiterated the need for a more balanced financial structure for the country (banking sector, bond and equity markets)

Thank You
CONTACT CHONG KWEE SIONG Tel: 603 7628 1786 Email: [email protected]
No 19-G, The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia Tel : (603) 7628 1000 Fax : (603) 7628 1700 Website: http://www.ram.com.my

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