Capital Market: Debt

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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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The Malaysian Bond Market
Started in 1970s
Raise funds for countrys 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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Why we need a strong bond market:
Investors demand large amount of finance
The shift from labour intensive to capital
intensive industries demands long-term debt
financing
Long-term institutional investors need funds
for portfolio diversification and asset liability
management purposes
The Malaysian Bond Market
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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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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 governments strategic investor
and trustee to the nations 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

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Who are the Issuers in the
Malaysian Bond Market?
2. Pegurusan Danaharta Nasional Berhad
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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Who are the Issuers in the
Malaysian Bond Market?
3. Danamodal
A special purpose company incorporated by
BNM in 1998
To recapitalize and strengthen Malaysias
banking institutions and promote stability in
the local banking industry
to ensure that the banking sector continues to
be a lending conduit to corporations and
individuals
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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 -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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Who are the Issuers in the
Malaysian Bond Market?
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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
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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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 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 process
The profit rate will be distributed on a half-yearly
basis
Maturities of 3, 5, 7 and 10 years


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Debt Securities Products
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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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

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Corporate Bonds
Bond Pricing Agencies
What is the purpose of having a rating?
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 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 RAMs website for the bond
rating definitions
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Bond Pricing Agencies
Malaysian Rating Corporation Berhad
Provides ratings and comprehensive
research services
Refer to MARCs website for the MARCs
long-term ratings and short-term ratings
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Bond Pricing Agencies
Standard & Poors
A global and independent rating agency that
provides credit ratings and credit risk analysis
Moodys
Involves in credit ratings, research and risk
analysis

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