Thursday, April 8, 2010

Danajamin: The new kid on the block

Comment: Habhajan Singh

There is discontent among investment bankers when you talk about Danajamin Nasional Bhd. The new kid on the block, they argue, is competing head-on with them.
Instead of boosting the capacity of corporations with a slightly less than desirable financial position to enter the bond market, the financial guarantee insurer is in the fray to capture a slice of the business, themselves.
Investment bankers complaint that Danajamin is talking to corporations with enough financial firepower to go into the bond market unaided. In other words, they claim the new outfit is literraly sweeping clients from under their feet. This was evident looking at Danajamin's first client since it was established on May 15, 2009, with the aim of introducing financial-guarantee insurance, touted as a unique form of credit enhancement for private debt securities in the Malaysian bond market.
Without any fanfare, but a mere press release, Danajamin a fortnight ago revealed that its first credit enhanced debt guarantee went to Kencana Petroleum Bhd for a RM250 million sukuk issuance. Under the agreement, Danajamin will provide an al-kafalah guarantee for Kencana’s seven-year sukuk mudharabah medium term note programme.
The Danajamin backing gave Kencana issue a AAA rating. Anyone with Danajamin's backing would get that. You could hear some investment bankers screaming. How did public-listed Kencana find its way into Dajamanin's list? Surely, they argued, Kencana is able enough to enter the bond market on its steam, or make avail of the other avenues for raising funds.

The very idea of having Danajamin is to help firms who may have some trouble, on their own, to raise bonds one or two notches below.
While investment bankers are every hungry for deals, they have a point here. Does helping companies like Kencana the very reason for Danajamin's birth?
When releasing the 2009 annual report, Bank Negara Malaysia (BNM) had said that easing of monetary policy was complemented by other measures designed to reach specific sectors of the economy.
"Ensuring continued access to financing was a key policy priority," it said in its press release. Here, it said that BNM and the Government had implemented several measures, including the setting up of several special funds for the small and medium enterprises (SMEs) and the establishment of Danajamin to provide financial guarantees for the issuances of PDS and Sukuk by financially viable companies.
In its own words, Danajamin says that its objective is to provide credit enhancement to financially viable companies to help the companies achieve cost savings on overall funding, facilitate their access to bond market, and stimulate investments in the economy.

How does Danajamin's guarantee work? It provides a guarantee on the bond issuance which is an irrevocable and unconditional promise to pay coupon and principal to the bond investors, on behalf of the issuer, in an event of missed payment or default.
In return, the bond issuer will pay Danajamin a fee for the guarantee provided. Bonds that are guaranteed by Danajamin will automatically be upgraded to AAA, the highest rating for bonds. This will enable the bonds to be issued in the current risk adverse environment.
Neat and tidy. But it does raise a question when they make avail the facility to companies that are financially stronger, an area where bankers prowl. The market will watch closely who will be the next recipient of Danajamin's backing.

(The Malaysian Reserve, 5 April, 2010, Page 2)