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Topic Outline
Debt market instruments
Market players and institutions
Credit rating
Islamic capital market: Sukuk
Current developments
Capital Market Master Plan 2
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Introduction
What is a bond market?
How does the bond market promote the
economic development process of a
country?
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Debt instrument
A debt instrument is a paper or
electronic obligation that enables the
issuing party to raise funds by promising
to repay a lender in accordance with
terms of a contract. Types of debt
instruments include notes, bonds,
debentures, certificates, mortgages,
leases or other agreements between a
lender and a borrower.
(Investopedia)
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An investor who purchases a debt
instrument is essentially loaning her
money to the issuer, which could be a
government, bank, corporation,
business or some other entity. In return,
she usually receives compensation in
the form of interest payments and the
return of her principal.
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The Malaysian Bond Market
Started in 1970s
Raise funds for country’s development
projects
Bond issuers – started with the Govt and
later mostly by the private sector
During 1980s – main source of financing
After the 1997-98 Asian financial crisis, there
had been a conscious shifts towards the
bond market. Why?
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The Malaysian Bond Market
Why we need a strong bond market:
1. Financing
○ Investors demand large amount of finance
for the purpose of making investment
2. The shift from labour intensive to capital
intensive industries demands long-term
debt financing – investment in fixed assets
3. Long-term institutional investors need
funds for portfolio diversification and asset
liability management purposes
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Who are the Issuers in the Malaysian
Bond Market?
Government of Malaysia
To finance working capital and development
expenditure
How? By issuing diverse forms of govt securities
○ Malaysian Treasury Bills (short term) – working
capital
○ Interest-bearing long-term bonds – development
expenditure
○ Non-interest bearing securities based on Islamic
principles
Government Investment Issue
Malaysian Islamic Treasury Bills
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Who are the Issuers in the Malaysian
Bond Market?
Bank Negara Malaysia (Central Bank)
Issue bonds to manage liquidity in both
conventional and Islamic financial markets
Allowed 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?
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Who are the Issuers in the Malaysian
Bond Market?
Securities issued by Bank Negara:
○ Bank Negara Monetary Notes
Discounted or coupon bearing govt securities with
maturity of 91,182, 364 days and 1-3 years
To manage liquidity
Replaced BNM Bills and BNM Negotiable Notes by Dec
2006
Offered through competitive auction
○ Sukuk BNM Issues
Zero coupon bonds with maturities 1-2 years
Based on Ijarah (sale and lease concept)
○ Merdeka Savings Bonds
Targeted at retirees
Based on Islamic banking concept of Bai’ Al-Inah (sell
and buy back arrangement)
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Who are the Issuers in the Malaysian
Bond Market?
Quasi-government Institutions
1. Khazanah Nasional Berhad
○ Empowered as the government’s strategic investor and
trustee to the nation’s financial assets
○ To promote economic growth and make strategic
investments on behalf of the govt which would
contribute towards nation building
○ Select 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
○ An example of sukuk issued by Khazanah: refer to
http://www.khazanah.com.my/About-Khazanah/Our-
Case-Studies/Khazanah-360/Sukuk-Ihsan-Sustainable-
and-Responsible-Investme
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Who are the Issuers in the Malaysian
Bond Market?
2. Pegurusan Danaharta Nasional Berhad (now
managed under prokhas sdn. Bhd.)
○ A public company incorporated under the
Companies Act 1965
○ Wholly owned by the Malaysian Govt.
○ To act as the national asset management
company
○ Its principal objectives are to re-energize the
Malaysian financial sector by buying non-
performing loans (NPLs) and maximize their
recovery value
○ Has a special power to acquire, manage and
dispose of NPLs and assets
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○ Prokhas Sdn Bhd is a private limited company
wholly-owned by Minister of Finance,
Incorporated initially established to manage
the residual assets of Danaharta after it
closed its chapter on 31 December 2005.
Danaharta was a success story on its own,
where it had managed to achieve its NPL
recovery mission during the Asian financial
crisis and further assist to re-energise
Malaysia’s financial sector. Prokhas was then
entrusted to continue Danaharta’s work and
maximise the recovery value of the residual
assets.
(http://www.prokhas.com.my)
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Prokhas has been mandated to manage the
operations of few companies under Minister of
Finance Incorporated namely Pengurusan
Danaharta Nasional Berhad, Danainfra Nasional
Berhad, Syarikat Jaminan Pembiayaan
Perniagaan Berhad and Syarikat Jaminan Kredit
Perumahan Berhad.
In running the companies’ day-to-day operations,
Prokhas provides full spectrum of services ranging
from secretarial services, human resource, finance
and many more to the companies. This allows the
companies to operate without having to have
physical offices and manpower thus reducing the
operation cost of the companies.
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Who are the Issuers in the Malaysian
Bond Market?
Cagamas Berhad (National Mortgage
Corporation)
Established in 1986
The leading “securitization house”
○ Securitization is the process of taking an illiquid asset,
or group of assets, and through financial engineering,
transforming them into a security.
Promote the secondary mortgage market in
Malaysia
Issues 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
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Who are the Issuers in the Malaysian
Bond Market?
Cagamas debt securities include:
Cagamas Fixed Rate Bonds
○ 1 ½ -10 years, fixed coupon rate
Cagamas Floating Rate Bonds
○ Up to 10 years with adjustable interest rate
pegged to 3-month or 6-month KLIBOR rate
Cagamas Notes
○ Short-term with 1-12 months
○ Issued at discount
Sanadat Mudharabah Cagamas
○ Islamic bonds based on profit sharing
arrangement
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Who are the Issuers in the Malaysian
Bond Market?
Multilateral Development Banks
Refer to World Bank Group, five regional
development banks, the Global Environment Facility
and the International Fund for Agricultural
Development
Their objective is to provide financial support and
professional advice to the developing countries in
terms of economic and social development activities
Their sources of funds:
○ Borrow from international capital markets and re-lend to
the govts of developing countries and charge market
interest rates
○ Lend donated money and charge low interest rates
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Investors in the Malaysian Bond
Market
Employees Provident Fund
Pension Funds
Unit Trusts
Insurance Companies
Asset management companies
Discount houses
Commercial banks
Islamic banks
Investment banks
Securities companies
Finance companies
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Debt Securities Products
Types of Government Securities
Malaysian Treasury Bills
○ To finance short-term capital requirements
○ Issued at discount through competitive auction facilitated by
BNM. So, the return?
○ 3-months, 6-months, 1 year
○ Actively traded in the secondary market
Malaysian Islamic Treasury Bills
○ Short-term
Malaysian Government Securities
○ Borrowings of the Govt.
○ To finance long-term development project
○ Fixed rate coupon bearing bonds, coupon payment made semi-
annually
○ Issued by auction and by subscription, can be bought in the
secondary market and from BNM
○ Tenure of 3-20 years
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Debt Securities Products
Government Investment Issues
○ Long-term non-interest bearing government
securities based on Islamic principles to finance
developmental expenditure
○ Issued through competitive auction by BNM
○ Based on Bai’Al-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 process
○ The profit rate will be distributed on a half-yearly
basis
○ Maturities of 3, 5, 7 and 10 years
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Corporate Bonds
Fixed Coupon Bearing Bonds
Straight bonds
○ Fixed coupon rate, tend to carry high interest rates
Bonds with detachable warrants
○ What Does Detachable Warrant Mean?
A derivative that is attached to a security and gives the holder the
right to purchase an underlying security at a specific price within
a certain time frame. A detachable warrant is often combined
with various forms of debt offerings and can be removed by the
holder and sold in the secondary market separately.
○ Detachable Warrant
Many companies choose detachable warrants when issuing
bonds because it makes a debt offering more attractive and can
be an effective method of raising new capital. The exposure to
the right given by the detachable warrant can often gain the
attention of investors who do not usually participate in the fixed-
income markets.
○ A detachable warrant can be traded independently of the
package with which it was offered, and is similar to a call option.
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Corporate Bonds
Floaters
○ Interests are tied to some measure of current rates
Zero coupon bonds
○ No periodic coupons are paid
○ Sold at discount
Asset-backed securities
○ Securities backed by assets such as mortgages
Convertible bonds
○ Give the holder the right to convert the bond into a
specified number of shares
○ Lower coupon rate
Callable bonds
○ The issuers have the right to call back the bonds before
maturity
22
Islamic Capital Market: Sukuk
Sukuk commonly refers to the Islamic equivalent
of bonds.
As opposed to conventional bonds, which merely
confer ownership of a debt, Sukuk grants the
investor a share of an asset, along with the
commensurate cash flows and risk.
Sukuk securities adhere to Islamic laws which are
known as the Shari’ah principles, which prohibit
the charging or payment of interest.
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Islamic Capital Market: Sukuk
As a marketplace for global sukuk, Malaysia
issued US$77.9 billion or 66% of the total global
sukuk that was issued for the year 2014.
58% of the total sukuk outstanding globally is
domiciled in Malaysia, with a value of US$172.8
billion.
Malaysia stands out as the only sukuk market with
global outstanding above US$100 billion.
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Exchange Traded Bonds and
Sukuk (ETBS)
Bonds/Sukuk have always been seen as
an asset class to hedge when markets
are bearish and a means to develop a
steady income over many years.
In the past the bonds/sukuk market was
accessible only to high net worth and
institutional investors.
Now with ETBS, all investors can have
access to the bond/sukuk market with
ease, via the stock market.
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ETBS
What are ETBS?
ETBS are fixed income securities, also
known as bonds or sukuk*, that are
listed and traded on the stock market.
ETBS are issued either by companies or
governments (the issuer) to raise funds
for their needs. ETBS have varying
structures such as fixed rate, floating
rate and hybrids.
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What are the minimum investment
units?
ETBS are traded in minimum board lot
size of 10 units per lot size. Given the
principal price of RM100.00 per unit,
each board lot will cost RM1000,
excluding transaction costs.
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Bond Pricing Agencies
What is the purpose of having a rating?
The Purpose of Bond Ratings. Often,
before a borrower issues a bond, the bond
will receive a rating from one or more credit-
rating agencies. These ratings act as a
measurement of the likelihood that the
lender will be able to pay the bond on time
and in full.
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Bond Pricing Agencies
The rating agencies are independent
from bond issuing companies.
Focus on credit analysis of issuing
companies
Rating Agency Malaysia Berhad (RAM)
established in 1990 and Malaysian
Rating Corporation Berhad (MARC)
established in 1996
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Rating Process
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Bond Pricing Agencies
Rating Agency Malaysia Berhad (RAM)
Provides independent credit research and
advisory services to its customers
○ Help in decision making
Provides financial and credit expertise
through training as well as economic
research
Refer from RAM’s website for the bond
rating definitions
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RAM
Corporate Credit Ratings (National) - RAM Ratings' current opinion on the
overall capacity of an entity to meet its financial obligations
Long-Term Ratings
AAA An entity rated AAA has a superior capacity to meet its financial obligations. This is
the highest long-term CCR assigned by RAM Ratings.
AA An entity rated AA has a strong capacity to meet its financial obligations. The entity
is resilient against adverse changes in circumstances, economic conditions and/or
operating environments.
A An entity rated A has an adequate capacity to meet its financial obligations. The
entity is more susceptible to adverse changes in circumstances, economic
conditions and/or operating environments than those in higher-rated categories.
BBB An entity rated BBB has a moderate capacity to meet its financial obligations. The
entity is more likely to be weakened by adverse changes in circumstances,
economic conditions and/or operating environments than those in higher-rated
categories. This is the lowest investment-grade category.
BB An entity rated BB has a weak capacity to meet its financial obligations. The entity
is highly vulnerable to adverse changes in circumstances, economic conditions
and/or operating environments.
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Bond Pricing Agencies
Malaysian Rating Corporation Berhad
Provides ratings and comprehensive
research services
Refer to MARC’s website for the MARC’s
long-term ratings and short-term ratings
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Bond Pricing Agencies
Standard & Poor’s
A global and independent rating agency that
provides credit ratings and credit risk analysis
Moody’s
Involves in credit ratings, research and risk
analysis
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The Difference between Bonds/Sukuk and Shares
Bonds/Sukuk Shares
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Capital Market Master Plan 2 (CMP2)
2011-2020
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