Role of

Credit Rating Agency in

Malaysian Bond Market

African Union for Housing Finance Conference

Chong Kwee Siong

Technical Advisor, Group CEO Office

RAM Holdings Berhad

Dar Es Salaam, 8 October 2012

Financial Marketplace

Capital Market

Equity

Corporate Securities

Equity Linked

Derivatives

Debt

Private Debt

Market

Bonds Sukuk

Public Debt Market

Gov Bonds Quasi-Gov Bonds

Banking System

2

Disintermediation

Mobilise savings for capital formation

Mitigate currency and tenure mismatch

Reduce systemic risk

Benefits of a vibrant local currency bond market

Malaysia LCY bonds issued: USD167bn (2011)

4

Malaysia Outstanding LCY bonds: USD294bn (June2012)

5

Malaysia LCY bonds market: 102% of GDP (June 2012)

Size of Malaysian Domestic Bond Market (% of GDP)

Source: asianbondsonline 6

Malaysia 2nd largest bond market in Asia ex-Japan

Domestic Bond Markets in Asia (ex-Japan)

Source: asianbondsonline 7

Bond market an important component for capital formation

Pre-Crisis

As a % of GDP

Equities Bank Loans PDS

1995

1996

1997

254.2%

318.0%

133.4%

133.2%

125.8%

142.6%

10.2%

13.2%

16.5%

As a % of GDP Equities Bank Loans PDS

1998

1999

2000

132.2%

183.8%

129.9%

139.6%

125.5%

116.0%

16.5%

25.7%

29.4%

2001 139.0% 123.0% 37.2%

Post-Crisis

Domestic Financing Profile

41.2% June 2012 8

Malaysian Experience

Development Catalysts

Privatisation: Increased private sector financing demand due to privatisation and emphasis on private sector-led growth Infrastructure Development: Huge increase in capital financing requirement especially for infrastructure development. Bonds could be structured to match longer tenure requirements Corporate debt restructuring: Provide long term financing to address funding mismatches Financial Sector Liberalisation: Efficiency gains from disintermediation and competition - cheaper funding for companies issuing bonds and better returns for investors Fill the missing segment of the risk-return investment spectrum: fixed income instruments in addition to FD and Equity

9

Wide base of institutional investors

LCY Government & Corporate Bonds Investor Profile

10

Regulatory & Market Reform Measures In

fras

tru

ctu

re &

Inst

itu

tio

nal

Bu

ildin

g • Cagamas

• RAM, MARC

• Mandatory ratings

• Malaysian Institute of Bond Dealers

• RENTAS

• Bond Pricing Agency Malaysia

Re

gula

tory

Fra

mew

ork

• Guidelines for PDS

• Guidelines for ABS

• 1993: Securities Commission

• 1999: National Bond Market Committee

• Guidelines for Sukuk

• Guidelines for REITs

• Capital Market Master Plan

Fisc

al &

Fin

anci

al In

cen

tive

s • Tax exemption

• Stamp duty waivers

• Reduction in withholding tax

11

Rationale for establishing RAM

• A “missing link” institution in financial system 1

• Independent provider of credit opinions 2

• Developmental role for the bond market 3

credit ratings

Market education, training, credit culture, talent development, information dissemination, etc.

12

“An objective and impartial opinion on:

the ability and willingness of an entity to make full and timely payments of all its financial obligations,

or

creditworthiness of a particular debt obligation”

What are credit ratings?

13

What it is NOT

Ratings do not measure… Prepayment risk of the security

Market price of the security

Fraud

Rating changes

A recommendation to buy or sell investments

An audit

Any measure of defining good or bad companies

14

• Provision of aggregate information about the credit quality of sovereign entities, corporations, financial institutions, and their related debt offerings (“Information function”)

• Accessibility to global and domestic markets given the familiarity and widespread acceptance of credit ratings as a common yardstick for measuring credit risks and their continuous surveillance by CRAs (“Monitoring function”)

• Enhance liquidity through widening of investor pool through the widespread use of credit ratings (“Certification function”)

Functions of credit ratings

Applications of credit ratings

Issuers & counterparties

• Supports disclosure & transparency

Investors

• Common measure of credit risk to help make investment decisions

Regulators

• Help bridge information gap between issuer and investors

• Provides independent peer comparisons

• Enhances terms and conditions of borrowing

• Enhances access to new sources of funds

• Independent third party opinion

• Assist in portfolio monitoring

• Benchmark for risk premium

• Distill complex financial instruments into user-friendly rating symbols

• Promotes a more efficient capital market

• Help eliminate asymmetric information

• Facilitate implementation of risk frameworks

16

Applications of credit ratings

Yield curves and spreads Systematic relationship between credit ratings and yields

0

2

4

6

8

10

12

14

3-J

an-0

6

3-A

pr-

06

3

-Ju

l-0

6

3-O

ct-0

6

3-J

an-0

7

3-A

pr-

07

3

-Ju

l-0

7

3-O

ct-0

7

3-J

an-0

8

3-A

pr-

08

3

-Ju

l-0

8

3-O

ct-0

8

3-J

an-0

9

3-A

pr-

09

3

-Ju

l-0

9

3-O

ct-0

9

3-J

an-1

0

3-A

pr-

10

3

-Ju

l-1

0

3-O

ct-1

0

3-J

an-1

1

3-A

pr-

11

3

-Ju

l-1

1

3-O

ct-1

1

3-J

an-1

2

3-A

pr-

12

3

-Ju

l-1

2

%

Corporate bonds spread over 10-year MGS

AAA

AA2

A2

BBB2

BB2

Source: BPAM

0

5

10

15

20

25

30

1m 3m 6m 1y 2y 3y 5y 7y 10y 15y 20y

%

Malaysian Yield Curves

MGS

AAA

AA2

A2

BBB2

BB2

B2

17

• RAM Ratings

18

RAM Ratings

RAM Rating Services Berhad (previously known as Rating Agency Malaysia Berhad) was incorporated in 1990 as the first credit rating agency in Malaysia

Set-up as a Central Bank initiative to develop the corporate bond market

Regulated by the Securities Commission

CIMB Bank Berhad

14.425%

RHB Bank Berhad

8.850%

Malayan Banking Berhad

6.900%

Public Bank Berhad

5.325%

Standard & Poor’s

4.900%

United Overseas

Bank (Malaysia)

Berhad

4.200%

Hong Leong Bank

4.000%

Fitch Ratings 4.900%

Affin Bank Berhad

3.600%

Fitch Ratings 4.900%

Our shareholders

19

Key milestones

1991 Rated first corporate bond

1994 Rated first Islamic Sukuk

2000 First corporate default study report released

2004 Inaugural RAM League Awards

2006 Voted World’s 2nd Best Islamic CRA

2008 Launched nation’s first Sukuk Handbook

& Corporate Reorganisation

1993 Rated first financial institution

1997 Rated first insurance company

2003 Launched first Islamic

Finance Bulletin

2005 Rated first partnership-based Sukuk

2007 RAM Ratings formed

2009 First state rating assigned

2010 Marks 20th Anniversary & first

Corporate Social Responsibility event

2011

Awarded: 1) Most Outstanding Rating Agency for Sukuk

by KLIFF 2) Best Research in Islamic Finance from Dubai-

based CPI Financial 3) Best Islamic Rating Agency 2011 by Red

Money Group, Kuala Lumpur

20

Consumer & Industrial Ratings

Real Estate & Construction Ratings

Infrastructure & Utilities Ratings

Financial Institutions Ratings

Structured Finance Ratings

Islamic Ratings

Public Finance Ratings

Data & Analytics

Our teams and footprint

Our coverage by issuers

UAE

33%

Kingdom of Saudi Arabia13%

Kuwait

6%

South Korea

27%

Japan

7%

Hong Kong

7%

Singapore

7%Bank of Tokyo-Mitsubishi UFJ Limited

- Financial Institution Rating

Dar Al Arkan Real Estate Development Company

- Corporate Credit Rating

DBS Bank Limited

- Financial Institution Rating

Gulf Investment Corporation

- Financial Institution Rating

- MYR600 million Senior Unsecured Bonds

- MYR400 million Senior Unsecured Bonds

- MYR3.5 billion Sukuk Wakalah bi Istithmar Programme

Hana Bank – MYR1.0 billion Nominal

Value Multi-Currency MTN Programme

Hyundai Capital Services, Inc –

MYR2.0 billion MTN Programme

Industrial Bank of Korea – MYR3.0

billion Conventional and / or IslamicMTN Programme

National Agricultural Cooperative

Federation – MYR3.3 billion Senior Notes MTN Programme

Abu Dhabi Commercial Bank PJSC

- Financial Institution Rating

National Bank of Abu Dhabi PJSC

- Financial Institution Rating- MYR3.0 billion Senior Unsecured Islamic /

Conventional MTN Programme

ADCB Finance (Cayman) Ltd – MYR3.5 billion

Senior Unsecured MTN

Emirates NBD PJSC – Proposed MYR3.8

billion Senior Unsecured Conventional orIslamic MTN Programme

Abu Dhabi National Energy Company PJSC

- MYR3.5 billion Sukuk Murabahah Programme

Al Bayan Holding Company

- Corporate Credit Rating

Noble Group Limited - MYR3.0 billion Multi-Currency

Sukuk Murabahah Programme

Foreign Issuers Rated

Our coverage by bond value

As at end-March 2012

Diversified Holdings6.6%

Financial Services38.8%

Mining & Petroleum1.8%

Plantation &

Agriculture

0.4%

Consumer Products

0.9%

Industrial Products

1.5%

Construction & Engineering

1.4%

Property & Real Estate

3.9%

Transportation2.1%

Trading & Services2.3%

Infrastructure & Utilities35.9%

Asset-Backed

Securities

4.3% Public Finance0.2%

RAM-Rated Bond Value : RM746 billion

23

International Recognition

Top Domestic Rating Agency in the Asia Pacific Region by Asian Development Bank

The Most Influential Rating Agency in the Region

The Most Outstanding Rating Agency for Sukuk 2011

Best Research in Islamic Finance 2011 by Dubai-based CPI Financial

24

RAM Holdings Berhad Level 20, The Gardens South Tower

Mid Valley City, Lingkaran Syed Putra 59200 Kuala Lumpur

Tel: (603) 7628 1000 www.ram.com.my

Thank You

Types of ratings

Issuer credit rating

• Capacity and willingness to meet financial commitments

• Purely a default risk indicator

Issue rating

• Creditworthiness of a specific financial obligation

• Considers specific provisions of the instrument and the regulatory preferences of the debt Corporate Credit

Rating

Financial Institutions Rating

Claims Paying Ability

Financial Enhancer Rating

Issue / programme rating

Debt-based rating Partnership-based rating

Specialised groups:

Corporates Financial Institutions

Project Finance

Structured Finance

Sukuk Ratings

Public Finance

26

Rating definitions

LONG-TERM RATING SHORT-TERM RATING

AAA

AA 1

AA 2

AA 3

A 1

A 2

A 3

BBB 1

BBB 2

BBB 3

P3

BB 1

BB 2

BB 3

B 1

B 2

B 3

C 1

C 2

C 3

D D

P1

P2

NP

Spe

cula

tive

Gra

de

Spe

culative G

rade

Inve

stm

ent

Gra

de

Investm

ent G

rade

Superior capacity to meet its financial obligations

Strong capacity to meet its financial obligations

Adequate capacity to meet its financial obligations

Moderate capacity to meet its financial obligations

Weak capacity to meet its financial obligations

Very weak capacity to meet its financial obligations

High likelihood of default on its financial obligations

Currently in default on either all or a substantial portion of its financial obligations

AAA

AA

A

BBB

BB

B

C

D

Definitions

27

Malaysian Experience

The Malaysian Bond Market

Denominated in Ringgit Malaysia (MYR)

2 domestic rating agencies (RAM Ratings, MARC)

Investor base mainly institutional investors

World’s largest Islamic/Sukuk market

28

Sukuk overtook Conventional bonds since 2006

Outstanding LCY Corporate Bonds, 2001 - 2011

29

Our values

Credibility

Independence

Integrity Transparency

Credibility

Providing Direction

Opinions That Shape The Market

30