Key thrusts to develop Malaysia as an Islamic Financial Hub

Malaysia is a small country. With just over 26 million people and categorized as a “developing” nation, we must get our strategy correct as we may not be given the chance to start over if we miss the boat. After being involved in this industry for the last 19 years, in my humble opinion, these are the comparative advantage that we need to leverage on.

Impressive Human Capital

Without doubt, Malaysia has produced some of the best minds in Islamic finance. The experienced gained from the very vibrant Islamic finance market within Malaysia has been instrumental in building the skill sets as well as interest in the industry. In this context, I am referring to the professional human capital and not just the management class. Financial engineering, risk management, Syariah and legal are key components for a successful Islamic finance market and Malaysians are at the forefront in all these fields. In fact, Malaysia has been exported experts on these fields all over the world.

Vibrant Capital Raising Conduits

Malaysia has many capital raising conduits for Islamic Finance. From multinationals all the way down to the individual consumer, the ability to raise financing is very easy in Malaysia. The Sukuk market is very active and the numerous Islamic banks also help in the reallocation of capital to those that need them. The various options available to get capital are an important component that has helped the country to grow.

Ample Liquidity to Meet Demand

Malaysia has ample liquidity due to the high saving nature of the populace. Demand for capital has been met by overwhelming response by investors. The availability of numerous Islamic financial institutions that are able to aggregate savings makes Malaysia as a favorite destination to issue capital. Many multinationals have done so via the Sukuk market.

Transparent Legal and Regulatory Regime

The laws and regulatory regimes in Malaysia are second to none. The symbiotic existence of the Islamic finance laws with the English Common law makes Malaysia a very safe destination for all stakeholders as their rights are easily known and any disputes can be litigated using transparent rules.

Free Flow of Information

It is easy for financial information to be obtained in Malaysia. From trading data up to legal documents, users can easy access it. Everyone can make an informed decision based on the information available. Compared to other countries in the world, Malaysia is one of the top in terms of getting financial information.


We only need to focus on this four items and we can place Malaysia on the map.

MARC has removed its AAIS rating on DRIR Management Sdn Bhd’s Senior Class A Sukuk Ijarah MTN

MARC (May 18, 2011): MARC has removed its AAIS rating on DRIR Management Sdn Bhd’s (DRIRM) Senior Class A Sukuk Ijarah Medium Term Notes (MTN) from MARCWatch Negative pending the forthcoming June 2011 redemption of the remaining outstanding RM40 million principal amount of the MTNs. DRIRM will redeem the notes with cash from its Debt Service Reserve Account (DSRA) which is sufficiently funded for the purpose.

However, MARC continues to maintain its AA-IS rating on DRIRM’s RM160 million Class B Sukuk Ijarah MTN on MARCWatch Negative pending noteholders’ approval to convert the notes into non-publicly traded notes.

MARC expects to withdraw its rating on the Class B Sukuk upon receipt of notice of request for rating withdrawal from the issuer and confirmation that the aforementioned consent has been obtained.

Full report: www.marc.com.my

Special Power Vehicle's bondholders waive rating requirement

RAM Ratings (18 May 2011): RAM Ratings has received confirmation that the bondholders of Special Power Vehicle Berhad’s (SPV or the Company) RM215 million Class B Islamic Medium-Term Notes Facility (2005/2034) (Class B IMTN) have approved the resolution to withdraw its rating. As such, RAM Ratings has – at the request of SPV - withdrawn the C1 rating of the Class B IMTN and no longer has any rating obligation on the debt facility.

Meanwhile, the rating of SPV’s RM800 million Class A Islamic Medium-Term Notes Facility (2005/2022) remains at A1, with a stable outlook. SPV is a special-purpose vehicle set up as a funding conduit to raise the funds required for the development of Jimah Energy Ventures Sdn Bhd’s coal-fired power plant in Port Dickson, Negri Sembilan.

Full report: www.ram.com.my

RAM Ratings revises KLBK's rating outlook to stable, reaffirms AA3 debt rating

RAM Ratings (16 May 2011): RAM Ratings has reaffirmed the AA3 rating of Konsortium Lebuhraya Butterworth-Kulim (KLBK) Sdn Bhd’s (KLBK or the Company) RM247 million Secured Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS). At the same time, the outlook on the rating has been revised from positive to stable. KLBK is the toll concessionaire for the 17-km Butterworth-Kulim Expressway (BKE or the Expressway).

The revision of the rating outlook is based on the fluidity of the ongoing negotiations between PLUS Expressways Berhad (PEB) and the Government, with regard to the concession agreement(s) that will supplement/replace all the existing ones governing the 4 domestic tolled roads under the PEB Group, including the BKE. RAM Ratings opines that the uncertainty arising from the ongoing discussions and the possibility of protracted negotiations preclude any upward rating action in the near term.

Meanwhile, the rating of the BaIDS remains supported by the BKE’s healthy and proven track record on traffic volume as well as its robust debt-servicing ability, along with the expectation that these will stay commendable.

In 2010, the BKE achieved its best growth rate in average daily traffic for the past decade. On average, 62,704 vehicles plied the Expressway daily last year, translating into a robust 8.90% year-on-year improvement (2009: +4.30%). Penang’s resuscitated economy, heightened economic activity within the Kulim Hi-Tech Park and the progressive development of residential areas along the BKE had contributed to the commendable performance. Going forward, the BKE is envisaged to exhibit healthy single-digit traffic growth, supported by the aforementioned factors.

We note that KLBK’s debt-protection measures remain intact, with strong finance service cover ratios (FSCRs) of 1.63 times (without cash balances) and 5.26 times (with cash balances, post-distribution) as at end-2010. Looking ahead, the Company is expected to register a minimum FSCR of 2.50 times (with cash balances, post-distribution) on principal repayment dates. In assessing KLBK’s ongoing annual distributions to its shareholders, RAM Ratings’ sensitised cashflow assumes that the Company will adhere to its financial covenants throughout the tenure of the BaIDS (i.e. on a forward-looking basis) as opposed to only the year of assessment. Such covenants include compliance with the aforesaid post-distribution FSCR and a debt-to-equity ratio of at least 70:30.

In the meantime, the rating remains moderated by regulatory risk that is inherent in all tolled-road projects, apart from single-project risk.

Full article: www.ram.com.my 

MARC downgraded ratings on the RM335 million Super Senior B and RM190 million Senior primary CLO bonds by Prima Uno Berhad

MARC (Apr 12, 2011) - MARC has downgraded its ratings on the RM335 million Super Senior B and RM190 million Senior primary collateralised loan obligation bonds issued by Prima Uno Berhad (Prima Uno) to A- and C from AA+ and BB respectively. At the same time, MARC affirms the ratings of the remaining classes at AAA for the RM290 million Super Senior A bonds and C for both the RM40 million Mezzanine and RM95 million Subordinated bonds. The rating outlook on the Super Senior A, Super Senior B and Senior bonds remains negative.

The lowered ratings reflect continued deterioration in collateralisation ratios and credit quality of the loan portfolio as well as reduced tolerance to further loan defaults from obligors with weak liquidity positions. Since the last review in August 2010, five obligors have been downgraded, out of which two were downgraded to D upon failure to meet interest payments on January 21, 2011, bringing the total number of defaulted obligors to 10. As of March 10, 2011, the loan portfolio comprises 22 performing corporate loans of RM614.0 million, down from RM740.0 million as at July 26, 2010; one obligor has prepaid its entire RM20.0 million loan. The reduced loan portfolio has resulted in lower collateralisation ratios of 107.5%, 80.7% and 76.7% for the Super Senior B, Senior and Mezzanine bonds respectively (last review: 118.4%, 90.8% and 86.5% respectively). MARC believes that recovery prospects on the defaulted loans are poor based on the credit profiles of the defaulted obligors and continues to assume zero recovery of principal outstanding. Additionally, the agency views the collectibility of loans subject to mandatory prepayment as uncertain. The number of obligors downgraded below the BBB threshold stood at 13 as at March 10, 2011, affecting a total of RM323.0 million of loans.

Meanwhile, the affirmed rating on the Super Senior A bonds reflects a strong collateralisation ratio of 260.2%, and the bonds’ ability to withstand loan defaults in a MARC ‘AAA’ stressed scenario.

Further supporting the bonds are RM45.1 million of balances in the Liquidity Reserve Account (LRA) as at March 10, 2011, following RM72.3 million in prepayments from six obligors on January 26, 2011. An extraordinary resolution was passed on December 6, 2010 allowing obligors to make partial or full prepayment of outstanding loans under the loan portfolio. The bulk of the prepayments were used to redeem RM54.1 million in Super Senior A bonds, leaving outstanding bonds at RM235.9 million. The funds in the LRA are sufficient to cover at least the coupon payments on the CLO bonds for the remaining two payment dates up to maturity on January 26, 2012.

As at March 10, 2011, the portfolio’s weighted average rating (WAR) factor improved to 9.99 (A-/BBB+), from 15.1 (BBB) with the exclusion of the two most recent defaulted obligors from the WAR computation. Based on the WAR and projected tenure-adjusted default rates, MARC’s cash flow sensitivity results continue to show that while Super Senior A and Super Senior B bonds can still withstand a ‘AAA’ stress scenario, the Senior and Mezzanine bonds are exposed to a very high likelihood of default at maturity. The Super Senior A bonds are able to withstand about six more obligor defaults of RM40 million each before failing to meet its minimum required collateralisation ratio of 150%. However, the Super Senior B bonds can only withstand two obligor defaults before principal impairment occurs.

The negative rating outlook on the corresponding bonds reflects MARC’s expectations of further downward obligor rating migration as MARC foresees continued pressure on the credit quality of lower-rated performing obligors.

Full article: www.marc.com.my

RAM Ratings assigns preliminary A3 rating to Bank Muamalat's proposed sukuk, reaffirms A2/P1 financial institution ratings

RAM Ratings (09 May 2011): RAM Ratings has reaffirmed Bank Muamalat Malaysia Berhad’s (Bank Muamalat or the Bank) respective long- and short-term financial institution ratings at A2 and P1; the rating of the Bank’s RM250 million Islamic Subordinated Bonds (2006/2016) has also been reaffirmed at A3. Concurrently, RAM Ratings has assigned a preliminary long-term rating of A3 to the Bank’s Proposed Islamic Subordinated Sukuk Programme of up to RM400 million (Proposed Subordinated Sukuk). All the long-term ratings have a stable outlook. The 1-notch difference between Bank Muamalat’s A2 long-term financial institution rating and the A3 ratings of its Proposed Subordinated Sukuk and RM250 million Islamic Subordinated Bonds reflects the subordination of the debt facilities to the Bank’s senior unsecured obligations.

Bank Muamalat’s credit fundamentals remained intact during the period under review. In April 2010, the Bank adopted Financial Reporting Standard 139 on recognition criteria for impaired financing. As at end-December 2010, its gross impaired-financing ratio worked out to 5.2% (restated ratio as at end-March 2010: 8.0%) after having written off RM263.1 million of impaired financing. Though still weaker than the industry average of 3.3% as at the same date, RAM Ratings acknowledges the gradual improvement in the Bank’s asset quality since the new management team had been installed in late 2008. Its financing delinquency ratio, in particular, had ameliorated from 9.5% as at end-March 2010 to 7.9% as at end-December 2010. Nonetheless, we opine that more time is needed for the seasoning of its new financing portfolio given that the management only commenced the Bank’s new credit-risk-management infrastructure and processes towards the end of 2009.

RAM Ratings perceives the Bank to have a small presence relative to its peers, with about a 1%-share of the market’s outstanding financing and deposits. On this note, the Bank is embarking on its growth strategies as part of its transformation plan to attain a larger market share in the competitive consumer and corporate-banking segments. In 9M FY Mar 2011, Bank Muamalat recorded a stronger pre-tax profit of RM143.7 million (9M FY Mar 2010: RM106.9 million), largely anchored by lower financing-loss provisions. Going forward, RAM Ratings expects the Bank’s credit costs to moderate as a more rigorous credit-risk-management infrastructure has been installed to ensure stricter financing origination while efforts to clean up legacy troubled credits are almost completed.

While the management has been gradually rebalancing the Bank’s securities portfolio with a greater concentration of government securities and higher-rated debt papers, Bank Muamalat is still exposed to some private debt securities (PDS) that may have a negative impact on its future earnings, in the form of future impairment provisions. Its PDS holdings meanwhile had decreased from about 68% of its securities portfolio as at end-March 2010 to 53% as at end-December 2010. RAM Ratings understands that the gradual selling down of the Bank’s PDS portfolio is expected to continue this year and is in line with its plan to only hold such investments for the short- to medium-term.

Notably, Bank Muamalat has enjoyed strong support from its shareholders, as evinced by RM500 million of capital injections from DRB-HICOM Berhad (DRB-HICOM) and Khazanah National Berhad (Khazanah) in March 2009. As a result, the Bank’s Tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) came up to 14.3% and 18.4%, respectively, as at end-December 2010. The Bank plans to raise up to RM400 million from its Proposed Subordinated Sukuk in FY Mar 2012, to boost its capitalisation; this will lift its pro forma RWCAR to 19.6%, based on its risk-weighted assets as at end-December 2010.

Meanwhile, we note that Bank Muamalat has a high level of depositor-concentration risk; its top 20 depositors accounted for about 45% of its total customer deposits as at end-December 2010. Nevertheless, the Bank’s long-standing relationships with its depositors help to maintain the stability of its deposit base. The Bank is also making efforts to diversify its depositor base to reduce over-reliance on funding from large depositors. On a more positive note, Bank Muamalat maintains a very liquid balance sheet, with a liquid-asset ratio of 61.0% as at the same date - thus mitigating its depositor-concentration risk.

On 22 April 2011, DRB-HICOM announced its acquisition of a 32.2% stake in Pos Malaysia Berhad (Pos Malaysia) from Khazanah which is expected to be completed by end-June 2011. Upon completion of the acquisition, DRB-HICOM will replace Khazanah as the single largest shareholder of Pos Malaysia. RAM Ratings will monitor for any potential impact to Bank Muamalat and re-assess the rating, if necessary.

Full article: http://www.ram.com.my

RAM Ratings places EON Bank on Rating Watch with a positive outlook

RAM Ratings (6 May 2011): RAM Ratings has placed EON Bank Berhad’s (EON Bank or the Bank) A1/P1 long- and short-term financial institution ratings, on Rating Watch, with a positive outlook. Concurrently, we have also placed the respective A3 and A2 long-term ratings of the Bank’s Innovative Tier-1 Capital Securities Issuance Programme (Tier-1 Capital Securities) of up to RM1 billion and Subordinated Medium-Term Notes (Sub MTN) Issuance Programme of up to RM2 billion on Rating Watch, with a positive outlook.

On 29 April 2011, EON Capital Berhad (EON Capital), announced to Bursa Malaysia that it had on 28 April 2011 accepted the offer made by Hong Leong Bank Berhad (Hong Leong Bank) to acquire the assets and liabilities of EON Capital for approximately RM5.1 billion. EON Bank is the core subsidiary of EON Capital.

The Rating Watch is premised on the proposed acquisition of all the assets and liabilities of EON Capital by Hong Leong Bank. Upon completion of the proposed acquisition, the ratings of EON Bank’s debt facilities will be upgraded to reflect Hong Leong Bank’s credit as the obligations of the former will be assumed by Hong Leong Bank, while EON Bank’s financial institution ratings are likely to be withdrawn. The financial institution ratings of Hong Leong Bank had been reaffirmed at AA1/P1 with a stable outlook on 29 April 2011.

Full detail: http://www.ram.com.my/

Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent

Full article: http://www.bnm.gov.my/index.php?ch=8&pg=14&ac=2253

Bank Negara Malaysia (5 May 2011): At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 2.75 percent and 3.25 percent respectively.

The global economic recovery has continued in the first quarter of the year, but the growth has been highly uneven across regions. Growth in the advanced economies during this period has remained modest. In the region, despite some moderation, the growth has remained strong, supported by robust domestic economic activity. Global inflation has, however, increased on account of rising energy and commodity prices. In several countries, further upward pressure on inflation has been exerted by domestic demand conditions. Although the global recovery is expected to continue going forward, downside risks have increased, arising from the potential for higher energy and commodity prices, possible supply disruptions following developments in Japan, and the heightened volatility in capital flows to emerging economies.

In the domestic economy, the latest indicators point towards the continued strengthening of private investment and sustained private consumption expenditure in the first quarter. The export performance also improved, supported by regional demand. Going forward, the assessment is for the Malaysian economy to remain firmly on a steady growth path, with growth improving gradually during the course of the year. Growth will be underpinned by the firm expansion of domestic demand. Sustained employment conditions and income growth is expected to provide support to private consumption, while private investment is projected to strengthen amidst the improved investment environment. The developments in Japan are expected to have a limited impact on the overall domestic economy. Positive prospects for the region and strong demand for commodities are expected to continue to support the Malaysian economy.

Domestic headline inflation has continued to increase, rising to 3% in March to average 2.8% for the first quarter of 2011. The increase was mainly due to higher food and fuel prices. The assessment is that supply factors will continue to be a key determinant affecting consumer prices. Global commodity and energy prices are projected to remain elevated during the year, with inflation in major trading partners also expected to rise further. There are also some signs that domestic demand factors could exert upward pressure on prices in the second half of the year.

With the economy firmly on a steady growth path, the MPC decided to adjust the degree of monetary accommodation. At the current OPR level, the stance of monetary policy remains supportive of growth. The future stance of monetary policy will depend on the assessment of the risk to growth and inflation prospects.

BPA Malaysia Ringgit Bond Index overview as at end of April 2011

A rating action affecting the water industry had a major impact on the performance of the corporate bond and sukuk groups. The downgrade by MARC on 6th April 2011 of most of the water utility players caused a drop in value of RM1.052 billion from the market. Despite the sharp drop in the corporate market, the Government bond market rallied.

[Double click on the image to enlarge]

Briefing Session on Bond and Sukuk Valuation for MASB members - 3 May 2011

Today, BPA Malaysia organised a forum in collaboration with the Malaysian Accounting Standard Board members attended by more than 49 people. It was a first time that we had the chance to meet up with the accounting fraternity.

The agenda for the function are as follows:

9.00AM – 9.30AM Registration (to be handled by MASB)
9.30AM – 9.35AM Opening address by Meor Amri Meor Ayob, CEO, BPA Malaysia
9.35AM – 10.00AM Introduction to Bond Pricing Agency Malaysia by Mohd Shaharul, Chief Business Officer
10.00AM – 10.30AM Coffee Break (on Level 5 RAM Training Cafeteria)
10.30AM – 11.30AM Pricing Methodology by Simon Ng, Chief Pricing Officer
11.30AM – 12.00PM Q&A Session

Below is an excert of my opening speech:


"Good morning ladies and gentlemen.


Welcome to this event organized by Bond Pricing Agency Malaysia with collaboration with MASB. Personally and well as on behalf of the company, I would to extent my appreciation to each and every one of you for being here today.


BPA Malaysia is a creature of regulation. We are under the securities commission under the Bond Pricing Agency Guidelines. When we were established back in 2004, it took 2 full years before we were recognized by the SC as a BPA after stringent assessment of our systems, methods and people. The authorities even allowed the industry affected by the BPA concept to have a say on us.


Although we passed this rite of passage, I always remind myself and my team not to be complacent. We have never taken this stamp of approval by SC for granted. Instead, our corporate tune has always been on winning trust. Since establishment, we have always engaged all the stakeholders to not only bring our massage across but also to listen to comments, suggestions and criticism. We would like to work with everyone and see whether we can help make their work easier."