Malaysia’s credit guarantee fund is looking to lift its profile in the local capital markets after a decline in earnings in the first half of the year.
Fresh from its own debut in the ringgit bond market, Danajamin Nasional planned to guarantee M$600m–$800m (US$143m-$191m) of corporate bonds to be issued over the next few months, chief executive officer Mohamed Nazri Omar told IFR.
A pick-up in primary guarantees will bolster earnings and boost the state-owned bond insurer’s reputation as a catalyst for the development of the Malaysian capital markets. However, it also poses a challenge for Danajamin, which has a cautious attitude towards credit risk and, so far, has not faced any claims under its guarantees.
“Over the last two years, we have seen an increase in credit applications from industries undergoing challenging scenarios. In some instances, we have had to turn down some of these applications in order to safeguard our capital and balance sheet,” Omar said.
“In addition, we have also seen a few of our transactions being deferred or stretched much longer than usual to achieve issuance.”
Since its establishment in 2009, Danajamin has guaranteed both conventional and Islamic bonds, totalling M$16bn, from 31 Malaysian corporations across 12 different sectors, including 18 first-time issuers. It has helped finance M$5.2bn of real-estate assets, Sabah’s first international hospital, and the restructuring of a financing for a privately owned power producer at Kulim Hi-Tech Park.
Over the past two years, however, the number of Danajamin-wrapped transactions has slowed. A high rate of issuers’ early redemptions dented the agency’s gross written premiums and profitability for fiscal year 2016 and the first half of 2017. In the first half of 2017, net earned premiums amounted to M$38.6m, against M$44.9m in the first half of 2016.
Malaysian rating agency RAM said the business was running “below potential”. It rates Danajamin AAA on account of its state shareholders, the Ministry of Finance and Bank Negara Malaysia’s Credit Guarantee Corporation Malaysia.
DEBUT ISSUE
Omar argues that Danajamin is a victim of its own success, as the guarantee programme has allowed issuers to refinance through standalone bonds or in the banking system.
“It is one of Danajamin’s unique strategies to encourage clients that have achieved a better credit profile to migrate to mainstream financial institutions,” Omar said.
“This is a testament to our assistance in guiding them to improve their credit profiles such that they no longer need us, in some cases, even prior to their scheduled maturity dates.”
The insurance agency has also moved beyond plain guarantee facilities into more complex structures that allow investors to take greater exposure to a specific project or asset.
For instance, Danajamin only guaranteed a M$125m Class D junior tranche of the M$450m 10-year asset-backed sukuk for Purple Boulevard, which raised funds to acquire Ampang Point shopping mall in Kuala Lumpur in November 2015.
It also sold its first “drop-off” guarantee in August, covering Northern Gateway Infrastructure’s M$340m bonds only during the project phase. The guarantee, which will expire once construction is completed, helped raise funds for an immigration, customs, quarantine and security project in Kedah.
While Malaysian investors are familiar with construction risks and limited recourse project financings, the issuers are typically high-quality investment-grade credits. Danajamin’s drop-off product prised open the door for investors to take construction risk in lower-rated bonds.
Danajamin recently made headlines with maiden bonds of its own. It sold a M$500m 10-year non-call five Islamic Tier 2 notes, priced at 4.8%. The issue was well covered at 1.6x, showing a healthy appetite for the well-known credit.
Despite the strong demand, Danajamin is unlikely to return to the market as a regular issuer simply because it does not need the funds. The main goal of the issue was to diversify its sources of regulatory capital beyond equity and retained profits, a move that will help meet new risk-based capital rules aimed at limiting concentration risks in capital raising.
“We have made a concerted effort to ensure that we reach out to a diverse investor base through our townhall session and substantial engagements with various investors in marketing this subordinated debt issuance,” Omar said. “As a result, we saw this first issuance well taken-up with a diverse mix of investors.”
Danajamin priced the M$500m sukuk on September 26 at a profit rate of 4.8%. AmInvestment Bank and Maybank were joint lead managers on the issue, as well as joint lead arrangers on a M$2bn senior and subordinated sukuk murabahah programme.
