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Meor Amri ... ‘The guaranteeindustry essentially involves thetransfer of risks.’
Monday September 28, 2009
Demand poser for privatedebt papers
PETALING JAYA: Even if Danajamin Nasional Bhd succeeds in helpingrestore confidence in the single A and triple B-rated bonds, it may not beso much a question of reviving the private bond guarantee market as theneed to stimulate demand for these papers.During an economic upswing, it is easier to find investors who are morewilling take on higher credit risks for substantially higher returns.“Perhaps to give it a nudge, the authorities could consider providingincentives to investors to hold lower-rated papers, for example, tax relief from income earned from holding such papers, and at the same time,requiring certain classes of institutional investors to hold at least a certainportion of their portfolio in such papers,’’ said Peter Choong, head of debtcapital markets, RHB Investment Bank.Citing market concerns, Choong saidinvestors might even be lulled by the safetyof Danajamin-guaranteed bonds and wouldeventually only have appetite for suchbonds and nothing less.To avoid a potential situation of investor complacency, one suggestion is thatinstead of Danajamin providing full-fledgedguarantees, investors could have recourseto Danajamin for up to a certain limit inrespect of any bond defaults originally“sanctioned’’ by Danajamin.“The bonds would still be issued on a stand-alone basis. What is requiredis for Danajamin to ‘endorse’ a particular issue after which investorsbuying into the bonds would enjoy that limited recourse. This would help,to a certain extent, credit concerns of investors when investing in suchpapers,’’ Choong said.Further issues that could impact the development of a bond guaranteemarket involving banks include the cost of credit wrap and overall cost of funding.“In the event that credit enhancement is necessary, it is only natural for corporations to seek out a triple A rated financial institution,’’ said LizaMohd Noor, CEO of RAM Ratings Bhd.Since not all banks carry that rating, from the perspective of theguarantor, the premium charged must be sufficient for them to take on thecredit risk.In the end, it is a question of whether the overall coupon to be paid, after taking into account the cost of the bank guarantee, is lower than thatpayable on a stand-alone basis.“There is also the question of whether investors recognise a guaranteefrom a financial institution to be equal to that provided by Danajamin eventhough both are rated triple A.“This will inevitably have an impact on the overall funding cost. As it is,
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Demand poser for private debt papershttp://biz.thestar.com.my/news/story.asp?file=/2009/9/28/business/471...1 of 210/9/2009 9:39 AM
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