Capital Market: Debt

Introduction

What is a bond market?

How does the bond market promote the
economic development process of a
country?

Introduction

A market where fixed income securities are issued

and trade is called Debt Market.
Govt. needs large amount of money to carry out
many welfare activities.
Govt. raise money by issuing govt. securities (.i.e.
Debt Securities)

Debt Market is vast in nature

The turnover of Debt Market is greater than Equity Market in

all over the world

Advantage
s

Advantages

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?

The Malaysian Bond

Market

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

Who are the Issuers in the

Malaysian Bond Market?

Who are the Issuers in the

Malaysian Bond Market?
1.

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

Who are the Issuers in the

Malaysian Bond Market?
2. 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?

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?
3. Quasi-government Institutions /public
sector
a) 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?
b) Pengurusan 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 nonperforming 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?
c) 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?
d) 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?
e) 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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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
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Legal and Mandatory

Requirements for most
institutions

EPF - 50% of its investible fund

Insurance Companies - 20% in

low risk assets including MGS

Banking Institutions - 15 % of their

EL to be invested in liquid asset

including MGS

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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 semiannually
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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Debt Securities Products

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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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 fixedincome 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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Corporate Bonds
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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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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Bond Pricing Agencies

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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