TOPIC 5 - BOND MARKET (2) accounting information

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1. TOPIC 5 (CHAPTER 5) BOND MARKET 1 Updated: Sept23

2. LEARNING OUTCOME: At the end of this lecture, students should be able to: Describe the structure of bond market. Describe the different types of bond issuers in the Malaysian bond market. Describe the different types of bond investors in the Malaysian bond market. Describe the different forms of debt securities. Explain the role of the bond pricing agencies. Explain how bonds are rated. 2 Updated: Sept23

3. Contents: 3 Updated: Sept23

4. 1- What is a Bond Market? 4 Financial market where participants: issue new buy sell Debt securities  f inancial asset: Entitled their owners to a stream of interest payment Can be structured based on conventional perspective and Islamic perspective Also known as Debt market or Fixed-income market or Credit market. For: Government  raise capital to pay debt or funds infrastructural improvement Publicly-traded companies  finance business expansion/ maintain ongoing operation Debt securities Updated: Sept23

5. 2- Malaysian Bond Market 5 One of the largest & most developed in the Asian region. The Malaysian Government started to issue bonds in the 1970s. https://www.bnm.gov.my/financialmarkets/bondmarket Updated: Sept23

6. 3.2- Bank Negara Malaysia 3.3- Quasi-government Institution 3.4- Cagamas Berhad 3.5- Multilateral development banks 3.1- Government of Malaysia 01 02 03 04 05 3- Bond ISSUERS 6 Updated: Sept23

7. 3.1- Government of Malaysia Government issues marketable bonds to finance : working capital – Malaysian Treasury Bills (MTB) development expenditure - Malaysian Government Securities (MGS) For development expenditure, the government issues interest-bearing long-term bonds in the domestic capital market. Bonds raised in the capital market bear fixed rate semi-annual coupon payments with repayment of principal upon maturity. Also issues long-term and short-term non-interest –bearing securities based on Islamic principles . Malaysian Government Investment Issues (MGII) – Sukuk Prihatin Malaysian Islamic Treasury Bill (MITB) 7 Updated: Sept23

8. 3.2- Bank Negara Malaysia Roles and responsibilities of BNM includes: the economic management, institution building and expansion of financial system. Acts as the banker and adviser to the government (role includes managing the liabilities of the government both in Malaysia and abroad, advises on loan programmes such as planning the government securities auction calendar, timing of loan and issuing of new types of securities) The central bank issues bonds to manage liquidity in both the conventional and Islamic financial markets Bank Negara provides temporary advances to the government to cover any deficit in the budget revenue. 8 Updated: Sept23

9. 3.2- Bank Negara Malaysia (Cont’d) Examples of securities issued by Bank Negara are: Bank Negara Monetary Notes (BNMN and BNMN- i ) Discounted or coupon bearing government securities with maturity periods of 91, 182 and 364 days and one to three years. Issued to manage liquidity in both conventional and Islamic markets. Offered through competitive auction among principal dealers. Sukuk Bank Negara Malaysia Ijarah (SBNMI) Issued on 16 February 2006 - based on Ijarah ( sale-and-lease back ) concept Sukuk 1Malaysia 2010 RM3 billion on 21 June 2010 https://www.bnm.gov.my/-/issuance-of-sukuk-1malaysia-2010 9 Updated: Sept23

10. 3.3- Quasi-government Institutions Khazanah Nasional Berhad It is the investment holding arm of the Government of Malaysia. Issue bond via Rafflesia Capital Limited – launch Shariah compliant bond (USD750 million 5-year bonds due in 2011) Pengurusan Danaharta Nasional Berhad Public company wholly owned by the Malaysian government . Act as the national asset management company . Re-energize the Malaysian financial sector by buying non-performing loans (NPLs) from financial institutions and maximize their recovery value. 10 Updated: Sept23

11. 3.3- Quasi-government Institutions (Cont’d) Danamodal Special purpose company incorporated by Bank Negara Malaysia. Recapitalize and strengthen Malaysia’s banking institutions. Promote stability in the local banking industry 11 Updated: Sept23

12. 3.4- Cagamas Berhad The National Mortgage Corporation. Leading securitization house. Issue debt securities to finance the purchase of government servants’ housing loans. Promote development of the private debt securities market and secondary mortgage market in Malaysia. Cagamas issues are: Cagamas Fixed Rate Bonds Cagamas Floating Rate Bonds Multicurrency Sukuk Cagamas Notes Sanadat Mudharabah Cagamas (housing loan, finance/lease) 12 Updated: Sept23

13. 3.5- Multilateral Development Banks (MDBs) Refers collectively to the: World Bank Group 5 regional development bank The Global Environment Facility The International Fund for Agricultural Development Objective: to provide financial support and professional advice to the developing countries in term of economic & social development activities. Grant financing for technical assistance, advisory services and project preparation. Ringgit-denominated bond & Ringgit sukuk. 13 Updated: Sept23

14. 4- BOND INVESTORS Employees Provident Fund Pension Funds Unit Trusts Insurance Companies Asset Management Companies Discount Houses Commercial Banks Islamic Banks Investment Banks Securities Companies Finance Companies Merchant Banks 14 Updated: Sept23

15. 5- Different forms of debt securities Islamic Bonds 5.3 Corporate Bonds 5.2 Government Securities 5.1 15 5.4 Islamic vs Conventional Bonds Updated: Sept23

16. 5.1- Government Securities Malaysian Treasury Bills – short-term discount securities issued by the Government of Malaysia for working capital Malaysian Islamic Treasury Bills – short-term Islamic Government securities, issued based on established Shariah principles Malaysian Government Securities – long-term interest-bearing debt securities issued by the Government of Malaysia to raise funds from the domestic capital market for development expenditure Malaysian Government Investment Issues (MGII) – long-term Islamic Government securities, issued based on established Shariah principles 16 Updated: Sept23

17. 5.2- Corporate Bonds Straight Bonds – often called “plain vanillas”, with fixed coupon rate and maturity period at the time of issue. Tend to carry high interest rate . Bonds with detachable warrants – options to purchase a number of shares at pre-set exercise price, within a specified time. Floaters – floating coupon rate. Zero-coupon bonds – sold at a discount and redeem at par on maturity. Asset-backed securities – backed by assets such as mortgages, loans, receivables, etc. E.g. mortgage bond requires the issuer to pledge certain real asset as security for the bonds. Convertible bonds – rights to convert the bonds into a specified number of issuers’ stocks, within a specified time and specified price. Callable bonds – issuer have the right to call back the bond before maturity. 17 Updated: Sept23

18. 5.3- Islamic Bonds ( Sukuk ) Debt-based bonds – for sale and purchase of assets based on deferred payment. Asset-based bonds – for income–generating assets (leasing). Equity-based bonds – joint venture business (represent common ownership and entitle the holders shares in a specific assets). Examples of Islamic bonds: Sukuk 1Malaysia 2010 Sukuk Perumahan Kerajaan (SPK) Sukuk Prihatin BNM – Sukuk Ijarah (sale and lease-back concept). Merdeka-Saving Bonds – for retirees (age 56 and above) Malaysian Islamic TB Bank Negara Monetary Notes (BNMN- i ) 18 Updated: Sept23

19. 5.4- Islamic vs Conventional Bonds 19 Items Islamic bonds Conventional bonds Primary level relationship Sales, lease, partnership, agency and sales of debt or income generating asset Loan Issuance process Must be approved by Shariah scholars and Securities Commission Must be approved by Securities Commission only Issuers Government, semi-government and private sector Government, semi-government and private sector Investors Both conventional and Muslim investors Only conventional investors Return to investors Profit elements in sale, lease or partnership contract, income generated from the underlying asset and recourse to the underlying assets Interest on loan and recourse to the issuer Updated: Sept23

20. 6- ROLES OF Bond pricing agencies 20 Updated: Sept23

21. 7- Bond RATING agencies 21 Updated: Sept23

22. 7.1- RAM Rating Services Berhad 22 One of the subsidiary companies for RAM Holdings Berhad (RAM Group) Responsible for providing credit rating assessment for corporate, sovereign nations, financial institutions, insurance companies, project finance and structured finance obligations. Leading and largest credit rating agency in Malaysia and South-East Asia (ASEAN) AND world’s leading rating agency for securities under Islamic principles such as Sukuk. 2016: Start providing ratings for ESG corporation. The Statement on ESG in Credit Ratings is a way for RAM Ratings to communicate their commitment to a more systematic and transparent incorporation of ESG into credit ratings and analysis. Updated: Sept23

23. 7.1- RAM Rating Services Berhad (Cont’d) 23 Updated: Sept23

24. 7.1- RAM Rating Services Berhad (Cont’d) 24 Updated: Sept23

25. 25 7.2- MARC (Malaysian Rating Corporation Berhad ) Established in 1996 Aims  provide information, insights, solutions and benchmarks for more robust and sustainable capital markets. MARC’s rating encompasses sovereigns, financial institutions, state governments and investment managers. Provide comprehensive assessment on ESG risks, which is recognized by Securities Commission Malaysia. Updated: Sept23

26. 26 7.2- MARC (Malaysian Rating Corporation Berhad ) (Cont’d) Updated: Sept23

27. 27 7.2- MARC (Malaysian Rating Corporation Berhad ) (Cont’d) Updated: Sept23

28. REFERENCE: Mohd Nizal Haniff , Norli Ali, Norashikin Ismail, Noreena Md Yusoff . Introduction to Malaysian Financial Markets (2024). Mc Graw Hill. Revised First Edition. https://www.bnm.gov.my/financialmarkets/bondmarket https://www.bnm.gov.my/-/issuance-of-sukuk-1malaysia-2010 https://www.ram.com.my/ratings/ https://www.marc.com.my/group/marc-ratings/ 28 Updated: Sept23