1 EXPERIENCE OF ECONOMIES IN SECURITISATION: MALAYSIA N. Kokularupan Chief Executive Officer, Cagamas Berhad ASEAN+3 Workshop on the Rise of Asset Securitisation.

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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

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Overview of the Bond Market

Asset Securitisation in Malaysia

The Way Forward

Outline

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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

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• 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)

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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

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• 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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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0

500

1000

1500

2000

2500

3000

3500

4000

Year

RM million

Government Investment Issues

Issuance of Government Investment Issues

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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

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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

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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

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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

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Overview of the Bond Market

Asset Securitisation in Malaysia

The Way Forward

Outline

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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Overview of the Bond Market

Asset Securitisation in Malaysia

The Way Forward

Outline

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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

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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

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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

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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

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