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Transcript of 1 EXPERIENCE OF ECONOMIES IN SECURITISATION: MALAYSIA N. Kokularupan Chief Executive Officer,...
1
EXPERIENCE OF ECONOMIES IN SECURITISATION: MALAYSIA
N. Kokularupan
Chief Executive Officer, Cagamas Berhad
ASEAN+3 Workshop on the Rise of Asset Securitisation in East Asia
7 - 9 November 2005
2
Overview of the Bond Market
Asset Securitisation in Malaysia
The Way Forward
Outline
3
Financial System in Malaysia
Financial System in Malaysia
Banking Sector
Non-banking financial Intermediaries
Financial Markets
Money and foreign
exchange markets
Commodity futures market
Financial futures and
options market
Capital market
4
• Until the early 1960’s, the bond or debt securities market was practically non-existent in Malaysia
• Until the mid-1980s, the Government was the main financier of growth and development
• In 1970, public sector debt accounted for about 2/3 of total debt financing (1/2 in 1985)
• MGS – captive market and generally held to maturity. Hence, trading was very thin and only picked up from late 1999 onwards
• Several regulatory and operational reforms were introduced to create an active and viable secondary market for MGS
• MGS remained the most actively traded bonds, accounting for about RM17.98 billion (87.6%) of the total monthly trading volume of RM20.52 billion in May 2005
Development of The Capital Market
Government (1960s – 1980s)
5
Development of The Capital Market
• By the mid-1980s, due to recession, the Government actively promoted the private sector as the main engine of growth
• The banking system became a dominant source of financing especially for infrastructure development
• There was rapid growth in the banking system loans which expanded at an average rate of 16% in the period 1985-1997, and accounted for an impressive 59% of total debt financing at the end of 1996, compared with public sector debt of 22%
• In 1996, prior to the Asian financial crisis, the banking system loans to GDP exceeded over 130% (2004: 114.8%), while the percentage of corporate bonds to GDP was only 18.4% (2004: 41.9%)
Banking System
6
• Prior to the 1997-1998 Asian financial crisis, the bond market was not deep and liquid enough to become a major mobiliser of savings and intermediator of funding needs
• With the onset of the crisis, Malaysia quickly recognised the need of having an efficient capital market in order to provide viable alternatives to the banking system for long-term financing
• In recent years, significant progress has been made in the development of the capital market. In 2004, total funds raised from the capital market continued to remain high at RM42.7 billion (2003: RM50.4 billion)
• In particular, Malaysia recognises the need to deepen and broaden the bond market as an important feature of the financial landscape to reduce vulnerability of the financial system and overall systemic risk
Development of The Capital Market
Capital Market
7
Net Funds Raised in the Capital Market
(10,000)
-
10,000
20,000
30,000
40,000
50,000
60,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Year
RM million
Public Sector Private Sector
8
Development of the Malaysian Bond Market
• From late 1986, the Government took measures to liberalise the MGS market and to widen the range and distribution of MGS in order to add depth and breadth to the market
• The Government took affirmative action to develop the PDS market as a whole to enable the private sector to tap alternative sources of financing
• Set up Cagamas Berhad, the national mortgage corporation, to promote the PDS market
Government’s measures
1986
9
The fledgling capital market only began to grow more rapidly after the establishment of Cagamas
Arising from Cagamas’ experience in issuing debt securities, other corporations have started to issue PDS as an alternative to borrowing from the financial institutions
The reduction in Cagamas’ market share of the PDS market from 60.5% as at end-1989 to 24.4% as at end-1998 and to 14.3% as at end-2004, reflects the increase in the popularity of debt issuance by others
Cagamas: Developing the PDS Market
10
Amount Outstanding: Cagamas Bonds vs PDS
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Jul-05
Year
RM
mil
lio
n
Other PDS Cagamas Bonds
11
Development of the Malaysian Bond Market
• More sources of financing directly via bond market
• Mostly conventional bonds in the beginning
• Deepening and broadening of bond market to include structured products to cater for sophisticated financing requirements
• Supportive regulatory framework
With the existence of debt market
1990s - present
12
As the demand for longer-term financing increased and economic conditions became conducive for the development of the PDS, the Government, SC and BNM then began to put in place a sound and robust market infrastructure, institutional framework and regulations which are prerequisites for the orderly development of the capital market
These include:
Development of the Malaysian Bond Market
• Introduction of The Guidelines for the Issuance of PDS to ensure orderly development of the market and to protect investors' interest
• Introduction of a Principal Dealer System to provide a reasonable continuous 2-way price quotations for debt securities
1989
13
Development of the Malaysian Bond Market
1990• Introduction of the Code of Conduct and Market Practices for Scripless
Trading in the Malaysian Securities Market to lay down the basic market rules
• Implementation of the electronic inter-bank funds transfer and scripless book-entry system to fully automate confirmation of trades and settlement of cash and securities transfers
• Establishment of the first domestic rating agency to provide a guide for assessing the quality of debt securities
Establishment of the Securities Commission (SC) following the Government’s decision to develop a more focussed regulatory authority
over an increasingly sophisticated capital market 1993
1995 Establishment of the second domestic rating agency to create a healthy competitive environment
14
Development of the Malaysian Bond Market
1997Implementation of the Bond Information and Dissemination System (BIDS) to provide up-to-date and timely information on bond trading to market participants
1996Establishment of Fully Automated System for Issuing/Tendering (FAST) as a centralised system to facilitate the primary issuance of all unlisted securities either through tender or non-tender
2000 SC became the single regulatory body for the supervision and regulation of the corporate bond market
1999Initiation of The Capital Market Master Plan to chart the strategic positioning and future direction of the Malaysian capital market for the next ten years
Source: BNM
15
Prerequisite for the development of a bond market is the existence of a benchmark to:- price issues
- facilitate the intermediation process through efficient market pricing and borrowing and lending decisions in the primary and secondary markets
Steps undertaken:- Regular issuance of 3, 5 and 10-year benchmarks
- Reopening of off-the-run issues and ensuring reasonable issue size
- Active two-way quotation for benchmark securities by Principal Dealers
- Since March 2000, BNM publishes the auction calendar for the issuance of MGS on an annual basis. Details include:(a) tenure for issue (c) quarter and month of issuance
(b) new issue or re-opening (d) via auction or private placement
Developing MGS Benchmark Yield Curve
16
Private sector bonds exceeds the public sector since 1999. Share of outstanding private sector bonds increased to 51.8% in 2004 (1996: 39.5%)
In many developed countries, bond issuance represents more than 90% of their GDP. Bond issuance in Malaysia is still small, but the volume of growth has been phenomenal
Growth of the Malaysian Bond Market
Source: BNM, Aseambankers
1998 1999 20001996 1997 2004200320022001
157 203 245119 134 363328278278
82 90 10372 71 175149125117
75 113 14247 63 188179153161
56 67 7146 47 81837783
Outstanding amount
RM billion
Public bonds
Private bonds
Total bonds outstanding (% of GDP)
17
Both the Government and corporate sector turning to the capital market to meet their funding requirements
Recognition that bonds are a more stable source of long-term financing
Growth of the Malaysian Bond Market
1997 1998 1999 2000 2001 2002 2003 2004 RM billion Bank Loans 88 5 1 24 16 20 22 40 Gross PDS 15 11 23 22 31 27 43 28 Equity 18 2 6 6 6 13 8 6 Total 124 13 22 50 40 35 72 75
18
Evolution of the Islamic Capital Market
1983 - 1993 Foundation and Infrastructure
1994 - 2005Formalisation and
Development
• Development of Markets, Players and Products
• Islamic Banking Act 1983• Bank Islam Malaysia 1983• Issuance of Government
Investment Issues (GII)• Takaful Act 1984• Islamic PDS debuted in
Malaysia in 1990 - issuance of Shell MDS Sdn Bhd valued at RM140 million
• 1993 – Conventional banks with Islamic windows
• 1994 – Islamic Interbank Money Market
• 1995 – Issuance of Islamic PDS
• 1997 – National Syariah Supervisory Council
• 2000 – Tradable GII• 2002 – Islamic Financial
Services Board• 2003 – Islamic repo• 2004 – 3 new full-fledge
Islamic banking licenses• Stronger acceptance for
Islamic products• Product development
Infant Market Broader Market Deeper Market
Future -Innovation and
Strategic Alliance
• New concept of issuance and trading that conforms with the international Syariah interpretation
• Islamic financial hedging instrument
• Increase the issuance amount and maturity of Islamic Government instrument
• Integrated international Islamic financial market
19
0
500
1000
1500
2000
2500
3000
3500
4000
Year
RM million
Government Investment Issues
Issuance of Government Investment Issues
20
The main advantages to the issuer:
- Provides an avenue for Islamic investors to invest in Syariah compliant investments
- Guarantees access to a larger investors base
- Provides potential lowering pricing to issuers via the wider investors base from the participation of Islamic investors
Islamic Bonds vs Conventional PDS
21
Islamic PDS Outstanding in the Market
020,000
40,00060,000
80,000100,000120,000
140,000160,000180,000
200,000
2000 2001 2002 2003 2004 Year
RM million
Islamic PDS Conventional Total
The Islamic bond market has experienced rapid growth in importance and size since its emergence in the 1990s
22
Islamic capital market guidelines, as well as the Islamic Capital Market Master Plan have strategically outlined prospective areas of development and growth
The issuance of Islamic bonds has expanded steadily at an average growth rate of 42.5% since 1995, primarily due to investor awareness of alternative funding sources i.e. Islamic instruments and the increased number of Islamic funds launched over the years
In a niche mainstream financial industry, Islamic debt instruments account for a large proportion of the PDS market- In 2004, the total funds raised via the issuance of Islamic bonds amounted to RM15.1 billion (17.6% of the total funds raised in the bond market)
- In 2004, Islamic bonds constituted more than 46% of total outstanding PDS
Islamic Bonds
23
In a bid to deepen and broaden the Islamic bond market, the Government has been regularly issuing Islamic and conventional securities with different maturities, enabling the creation of a benchmark yield curve
At the international level, the issuance of the first sovereign global Islamic Sukuk by the Government of Malaysia in 2002 acted as a catalyst for other countries and corporations to tap the international Islamic financial market
Islamic Bonds
24
Overview of the Bond Market
Asset Securitisation in Malaysia
The Way Forward
Outline
25
In February 2001, the Capital market Masterplan was launched
- sets the strategic position and future direction of capital market development for Malaysia
In April 2001, SC introduced the Guidelines on the Offering of Asset-Backed Securities (ABS) Guidelines
In Malaysia, the first ABS deal was undertaken in Aug 2001 by Prisma Assets Bhd Instrument : CBO
Issue size : RM255 million
Tenure : 5 years
Underlying asset : Diversified pools of PDS
Brief History of ABS in Malaysia
26
Value of ABS Issued in Malaysia
Securitisation deals outstanding as at 16 June 2005 amounted to RM9.29 billion or 6.4% of total corporate bonds outstanding
Source: BNM, Department of Statistics, Aseambankers
27
Benefits of Securitisation
Originators Investors Capital Market
• Transforms relatively illiquid assets into liquid and tradable capital market instruments
• Cheaper financing costs due to higher rating via credit enhancement
• Allows diversification of financing sources
• Facilitates removal of assets from the originator’s balance sheet
• Provides a variety of product choices at attractive spreads that attract a diversified investor profile
• Allows investment products to be tailored to meet specific investor needs - variety and flexibility of
credit- maturity and payment
structures
• The existence of secondary securitisation markets for benchmark purposes
• Facilitates and encourages efficient allocation of capital
• Reduces risks within the banking system
28
Efforts to Promote ABS
Regulatory framework
• In 2000, the SC became the single approval authority for all corporate bonds issue including ABS
• In 2000, the SC has established an Asset Securitisation Consultative Committee (ASCC) to advise the SC on steps needed to develop asset securitisation
• Introduction of:- 2001 - Guidelines on the Offering of ABS by SC- 2003 - Prudential Standards on Asset-Backed Securitisation Transactions by BNM
Market knowledge amongst issuers
• Cheaper costs and increasing investor familiarity with the way an ABS works are among the key reasons for the growing demand
29
Efforts to Promote ABS
Legal and Tax
• January 2001- Transactions relating to the issuance of ABS are exempted from stamp duty and property gains tax
• September 2004 - Interest income derived by non-resident companies from Ringgit denominated debentures and Islamic securities is exempted from witholding tax
Accounting
• The Malaysian Accounting Standards Board (MASB) has adopted relevant International Accounting Standard (IAS) for asset securitisation, to be effective on 1 January 2006
30
Issuance of ABS
Source: SC, RAM and MARC
As at 30 September 2005 No. Date
Issued Issuer Amount
(RM million) Tenure (Year)
Instrument Underlying Receivables
1 08/01 Prisma Assets Bhd 255 5 CBO Programme Diversified pools of PDS 2 12/01 CBO One Bhd 385 7 Secured fixed rate bonds Diversified pools of PDS 3 12/01 Securita ABS One Bhd 310 4 Subordinated notes Loans sold to Danaharta 4 10/02 ABS Real Estate Bhd 450 6 Subordinated notes
Senior notes Property rental receivables
5 11/02 Aegis One Bhd 900
100
7 5
Senior secured fixed rate bonds
Subordinated secured variable rate bonds
Cashflow from CLO
6 02/03 Auto ABS One Bhd 510 6 Redeemable asset-backed bonds
Auto loans receivables
7 07/03 Ambang Sentosa 1,050 3 BBA Islamic asset-backed debt securities
Receivables from a selective pool of SPA within participating projects
8 07/03 Special Port Vehicle Bhd 1,310 14 Asset-backed serial bonds Annual receivable payment due to KDSB from Port Klang authority under the SPA of a land
9 10/03 Astute Assets Bhd 689.5 8 Secured fixed rate and zero coupon bonds
A subordinated fixed rate term loan
10 01/04 Domayne Asset Corp Bhd
100 4 Medium term notes Credit card receivables
31
Issuance of ABS
Source: SC, RAM and MARC
No. Date Issued
Issuer Amount (RM million)
Tenure (Year)
Instrument Underlying Receivables
11 03/04 Synergy Track Bhd 88.5 63.5
5 5
Senior class bonds Subordinated class bonds
Retail and office property rental receivables
12 04/04 ABS Land & Properties Bhd
108.5 6 Asset-backed fixed rate notes Properties rental receivables
13 06/04 Kerisma 1,000 7 Asset-backed bonds Cashflow from CLO 14 10/04 Cagamas MBS Bhd 1,555 10 Residential mortgage-backed
securities Government’s staff housing loans
15 01/05 Cepat Assets Bhd 500 5 Secured fixed rate bonds Auto loans receivables 16 04/05 Musyarakah One Capital
Berhad 566.56 14 Asset-backed Sukuk
Musyarakah issuance programme
Receivables from Government
17 05/05 Premium Commerce Berhad
164 12 Asset-backed medium term notes programme
Auto loans receivables
18 08/05 Cagamas MBS Berhad 2,050 15 Islamic Residential Mortgage-Backed Sukuk Musyarakah
Government’s staff Islamic home financing
19 09/05 ABS Plantation Assets Berhad
95
10 BBA notes issuance facility Plantation properties
20 09/05 CapOne Berhad 1,000 5 CLO programme - Fixed rate bonds
Portfolio of corporate loans
Total 13,250.56
32
Securitisation of the Government’s staff housing loans and issuance of residential mortgage-backed securities by Cagamas MBS Bhd
Conventional Securitisation
RMBSProceeds
Issuance ofRM1,555 million
RMBS
CashSettlement
True Sale ofRM1,936 million
Portfolio Pool
GOVERNMENT’SHOUSING LOANS
DIVISION
TRUSTEE ANDSECURITY AGENT
CAGAMASMBS BERHAD
CAGAMAS BERHAD
INVESTORS
Equity(100% Ownership)
Portfolio Pool of RM1,936 million(Collateral/Security)
33
Securitisation of the Government’s staff Islamic home financing and issuance of Islamic Residential Mortgage-Backed Sukuk Musyarakah by Cagamas MBS Bhd
Islamic Securitisation
CagaMBS(Issuer)
Cash
Portfolio2005-1
Cash
SukukMusyarakah Sukuk
MusyarakahInvestors
TrusteeServices
GOM(Originator)
Cagamas
Ownership
TrusteeObligors
HousingFacilities
MonthlyRepayments
Sale of Portfolio 2005-1,by way ofEquitable
Assignment
Issuance of SukukMusyarakah byCagaMBS
to fund purchase ofPortfolio 2005-1
34
Tremendous potential for securitisation growth driven by auto loan receivables, credit card receivables, portfolio of housing loans, portfolio of small and medium enterprise (SME) loans and property rental receivables
The broadening and deepening of the Islamic financial market has seen the rise of Islamic debt, in particular Islamic asset securitisation / Sukuk as an alternative to conventional debt as a means of raising financing
Sukuk structures that have been developed in the International Islamic market include Sukuk al-Ijarah and the Sukuk al-Salam
Potential for Securitisation in Malaysia
35
Overview of the Bond Market
Asset Securitisation in Malaysia
The Way Forward
Outline
36
The Malaysian Bond Market
• Further product development e.g. structured products such as ABS and Islamic instrument
• Continuous refining of regulatory framework
• New identified areas of growth
• Increase in sophistication to deliver the financing needs of various projects
• Access to larger investor base, lower pricing to long-term issuers and provide an avenue for efficient and effective allocation of savings into investments
Industry growth
Future
37
Towards a Robust Debt Capital Market
Malaysian Debt Capital Market
Macroeconomics Stable and predictable macroeconomic environments
MGS market Healthy government bond market creates a conducive environment for the development of a robust corporate bond market
Corporate governance
Improved financial and transaction disclosure will help alleviate issues of credit risk
Regulatory framework
Developing and enforcing formal regulatory framework
Investors base Pension funds, insurance companies and other savings institutions play an important role in expanding investor base
Regional market Promoting regional bond market centres
38
The capital market will remain as an important source of financing for the economy. With successful completion of financial restructuring in Malaysia, issuance of PDS is likely to be used for expansion activities
The issuance of ABS is set to grow with support from the securitisation of the Government’s staff housing loans
Funds to be raised from the capital market to spur the growth of SMEs
Other on-going developments will further drive the growth of Malaysian capital market- This includes the regional economic and financial cooperation under the Asian Bond Markets Initiative which is expected to fasten efforts in
exploring securitisation and cross-border bond issuance
The Way Forward
39
Aseambankers, Broadening the Malaysian Debt Market, 23 June 2005
http://www.bnm.gov.my/
http://rmbond.bnm.gov.my/
http://www.sc.com.my/
http://www.marc.com.my/
http://www.ram.com.my/
http://www.statistics.gov.my/
Reference
40
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For more information, please visit our website at:www.cagamas.com.my
or email: [email protected]