In Malaysia, there have 2 kinds of rating agency exits in Malaysia’s bond market

which is RAM Rating Services Berhad and Malaysian Rating Corporation Berhad
both approved by Securities Commission Malaysia. The Securities Commission
announced that will remove the mandatory bond rating in January 2017. Since the
announcement coming out, the removal of mandatory bond ratings become a hot topic
that always been discussed by both investors and issuers. Even though this action will
liberalize the financial sector and broaden the corporate bond market but is the
removal of mandatory credit ratings a good decision or a bad decision? What is the
impact of this action on the bond market? we will discuss both advantages and
disadvantages of the removal of mandatory credit ratings in Malaysia. (Malaysia to
scrap mandatory ratings in bid to deepen bond market)

Advantages of liberalisation to the bond industry in Malaysia.

Prevent Investors’ Biases

Before the abolition of mandatory bond ratings, investors relied on bond ratings
when deciding on bond investments. From an investor's point of view, bonds with
good ratings such as A++, A+ and A will have a lower risk of default and are of
investment grade, while bonds with poor ratings will have a higher risk of default and
categories it as junk. However, in fact, bond ratings do not guarantee the company's
soundness. Well-rated bonds cannot guarantee the stability of the company's
sustainable operations, and badly-rated bonds cannot guarantee that they will perform
poorly in the future. Bond rating is only to assess the credit risk, it cannot measure the
quality of the company or its management. For example, in year 2014, the Kinsteel
Berhad Bonds issued with A rating also went to default.. After abolishing the
mandatory bond rating, investors can avoid the problem of bias when making bond
investment decisions by relying solely on bond ratings. Investors will form
independent opinions in order to make their own analysis when assessing the
company's future prospects and reputation, and thus make bond investment decisions,
rather than just relying on bond ratings to make bond investment decisions. Investors
are unlikely to make biased decisions because investors will not only look at bond
ratings to determine which bond they should invest in. (Removal of mandatory ratings
for bonds hailed)

Increase flexibility and liquidity

After the abolition of mandatory bond ratings, investors will not only rely on rating
agencies for credit ratings of bonds. Investors will evaluate the bonds and determine
their own risk profile. It enables investors in the bond market to differentiate and price
debt. For example, investors may price risk premiums on unknown or unrated bonds,
while for bonds with known credit ratings, investors may require a lower risk
premium. Not only that, after removal of bond rating, regardless of whether the rating
is unrated or unrated, there will be more types of bonds offered and traded on the
bond market. Before the cancellation of mandatory bond ratings, the range of bonds
issued and traded on the bond market may be limited. For example, the bond market
may only be flooded with rated bonds, and the liquidity of bonds may be limited to
those high-grade bonds. Those unrated bonds cannot be issued and offered to the bond
market. Therefore, after Malaysia abolished the mandatory bond rating, we can see an
increase in the trading activities of rated and unrated bonds in the bond market, and
liquidity has improved. (Removal of mandatory ratings for bonds hailed)

More diverse portfolio

There are only bonds that rated by mandatory bond rating are allowed to be issued
before the liberalization to the bond market in Malaysia. However, after the
mandatory bond rating was been removed, all the company regardless of size and
reputation can issue bonds in order to raise funds. It means that the local bond market
will become broader and more choices. After that, investors are able to choose the
most suitable bond to invest based on their portfolio and risk profiles to achieve their
goals and even diversify their portfolios by choosing the bonds that suitable theirs
goals. (Removal of mandatory ratings for bonds hailed)

Increase the knowledge in bond investment

Before the removal of mandatory bond ratings, the investors relied on the credit
ratings and evaluation of bonds published by the rating agencies, which make them
lack knowledge in bond investment. Investors no longer can only rely on the
information that gave by those rating agencies after the removal mandatory of bond
ratings. They need to analyze and evaluate such as analyze the financial performance
of the company before investing in the market in order to invest in the company that
can fulfill their requirement. This will help the investor to enhance the knowledge
about the bond market and help them to make a wise decision when invest in the bond
and understand more about the Malaysia’s bond market. (Removal of mandatory
rating will not harm agencies)
References:
TheStar, Removal of mandatory ratings for bonds hailed, viewed on 19 February
2021,
<https://www.thestar.com.my/business/business-news/2014/06/10/removal-of-
mandatory-ratings-for-bonds-hailed/ >
TheStar, Malaysia to scrap mandatory ratings in bid to deepen bond market, viewed
20 February 2021,
https://www.thestar.com.my/business/business-news/2017/01/13/malaysia-to-scrap-
mandatory-ratings-in-bid-to-deepen-bond-market/
The edge marketings, Malaysia's scrapping of mandatory bond credit ratings will cut
costs, diversify issuers, viewed 20 February 2021,
https://www.theedgemarkets.com/article/malaysias-scrapping-mandatory-bond-credit-
ratings-will-cut-costs-diversify-issuers
The Mole, Removal of mandatory rating will not harm agencies, viewed on 20
February 2021,
< https://www.mole.my/removal-of-mandatory-rating-will-not-harm-agencies >