Bond can consider as that authorized the issuer be liable to the holders of a debt. It is obliged to pay an interest and make repayment of the principal at dateline which calls a maturity period. The bond also can consider as formal contract to make repayment of the money at fixed interval and with some interest rate for it as well. From this, we know that the issuer can consider as the borrower but the holder can consider as lender and they obtain the interest which is coupon from the bond as well.
Besides that, it also provides the borrower with outer funds to invest, finance and support in the long-term financial investments of the companies. In other hand, the main objective of government bonds is to support and finance the current government expenditure of the government itself.
Furthermore, the bonds must be repaid at a certain fixed interval rate in a certain date of time and the commercial papers and deposit certificates are a money market instruments so not considered as bonds. Besides that, bond market is also consider as financial market where the participants are buy or sell their debt securities in the form of bond.
The main difference between the bonds and the stocks is that stockholders have an equity capital stock in their company whereby the bondholders have a creditor capital stock in their company. Besides that, the bonds normally have clearly condition and the maturity period after the bond is release as well. In other hand, the stocks will be outstanding indistinctly.
In July 2000, the Malaysia Securities Commission has assumed that the operation and function of a single approval authority for all of the corporate bond issues. The Malaysia Securities Commission is responsible for the formulation and conceptualizes of all of the policies aim to developed and manage an actively and dynamic efficient bond market in Malaysia.
The Securities Commission also tries to build up the Malaysia bond market as a top market and first choice for all in the world bond market. Anyone wants to operate applications for the issuance and publish of the private debt securities in Malaysia which must get the approval from the Securities Commission based on the Malaysia Securities Commission Act 1993 Section 32 as well.
As we know, the instruments which are traded on the Malaysian bond market obtain conventional and Islamic papers are includes the Government Securities, Bank Negara papers, Cagamas Papers, Private Debt Securities (PDS) and Asset Backed Securities (ABS) as well.
Government Securities
The Government Securities can conclude as a government debt obligation in term of local or national. The Government Securities are included:
Short-term Treasury bills
Medium-term Treasury notes
Long-term Treasury bonds
The Government of Malaysia issues a marketable debt instruments which call Malaysia Government Securities. The Government of Malaysia issues this security is to increase the stock and resources from the internal capital market to finance, invest or manage the government's development expenditure such as economic development, infrastructure development, education development, health development and social development.
In this, our Bank Negara Malaysia (Central Bank) become a banker of the country and also become as financial adviser to the Malaysia Government advises on such development, elaborate and information of the Malaysia Government Securities issuance activities and events to promote such issuance through different market infrastructures.
The Forms of Malaysia Government Securities
Malaysian Government Securities (MGS) is the interest relation long-term bonds which are issued by the Malaysia government to enlarge the funds from the domestic capital market for the purpose of our country development expenditure, for example, social development, economic development, infrastructure development and others.
The Government of Malaysia also issued Malaysian Treasury Bills (T-Bills) for the intention of working capital. Furthermore, the Malaysian Treasury Bills (T-Bills) also is a short-term security in the financial market.
The Malaysia Government Investment Issues (GII) and Malaysian Islamic Treasury Bills are the long-term and short-term non-interest relation government securities which are issued under the Islamic Shariah principles and concept by the Malaysia Government as well.
Objective of Issuance
The Malaysian Treasury Bills (MTB) and Malaysian Government Securities (MGS) are the short term and long term commercial papers issued on the conventional concept by the Malaysian Government to manage, finance and develop the economy of our country. The Government Investment Issues (GII) is proposing for the same purposes but issues under Islamic Shariah principles.
The Malaysian Government Securities (MGS) also were issued to meet the investment goals of the bank institutions and non-bank institution such as the Employees Provident Fund (EPF), domestic banks, financial companies or insurance companies. In the late 1970 and early 1980, Malaysia Government issues Malaysian Government Securities (MGS) to support the public sector's development expenditure to make our country economic development getting stronger and faster.
Recently in 1990, the main objective and purpose of Malaysian Government Securities (MGS) issuance is to supply and support the part of the government's budget deficit and prepay of the government's external loans and internal loans as well. The Malaysia Government also trying to continue to issue Malaysian Government Securities (MGS) during the fiscal excess to meet the market demand and needs for Malaysian Government Securities.
In way to allow the Islamic bank institutions to keep liquid flowing papers that meet their statutory liquidity requirements they issues the Malaysia Government Investment Issues and Malaysian Islamic Treasury Bills. The issuance of these papers also allowed them to invest their cash in such financial instruments that are issued based on the Islamic Shariah principles and concept as they are unable to buy, sell and trade in the Malaysian Government Securities and Malaysian Treasury Bill (T-Bills) or other interest financial instruments.
Short Term Treasury Bills
Short term treasury bills are short-term securities. It also can call T-bills and the maturity period is less than one year. The treasury bills are sold at a discount basic from their face value. If a bill is matures already, the investor will receive the face value from the investment and the difference between the purchase price and the face value is same to the interest earned.
Next, Treasury bills also can be purchased by individually and many types of entities including trusts, estates, corporations, partnerships, and others. Treasury bills also can be purchased by companies, organizations, fiduciaries, and corporate investors from the way through broker or financial institution as well.
Medium Term Treasury Notes
Medium term treasury notes are notes range in maturity period from one to ten years so it consider as medium Treasury notes. The investors will have an image of what its maturity period will be on the time they are compare its price to other fixed-income securities through the medium term treasury notes knowledge. All else will being the same and the coupon rate on medium-term notes also will be higher than short-term notes as well.
This debt program is used by a company so it can have fix cash flows coming in from its debt issuance and allows a company to suit the debt issuance to meet its financing goal and needs. Medium-term notes allow a company to register with the Securities Commission only once in place of every time for differing maturities.
Long Term Treasury Bonds
The long term Treasury bonds are issued in maturity period 30 years and the holder will received the interest every six months until come to the maturity period. When a long term Treasury bond is matures, the investors are paid the face value plus interest to them. The price of a Treasury bond is determined at auction way. Some time the price will be same, more or less to the face value of the bond itself. The Treasury bonds can purchase through the dealer, banks, broker and financial institutions.
Bank Negara Papers
The Bank Negara Bills (BNB) and Bank Negara Negotiable Notes (BNN) are issued by the Bank Negara Malaysia (Central Bank) to fulfill the market operations and demand as well.
But, in 2006, the Bank Negara Malaysia (Central Bank) was issues a security call Bank Negara Monetary Notes (BNMN) to replace the Bank Negara Bills (BNB) and Bank Negara Negotiable Notes (BNNN). The main objective and purposes of this security is to manage the liquidity in both the conventional and Islamic financial market.
The new Bank Negara Monetary Notes (BNMN) cans liquid the financial market better than Bank Negara Bills (BNB) and Bank Negara Negotiable Notes (BNNN) in Islamic and conventional financial market. Both of the financial market can have more liquidity cash flow in their market to avoid any unexpected thing happened. The maturity period of Bank Negara Monetary Notes (BNMN) is from one year to three years. Bank Negara Monetary Notes (BNMN) has longer maturity period compare to Bank Negara Bills (BNB) and Bank Negara Negotiable Notes (BNNN) as well.
Malaysia Overnight Policy Rate can consider as the individual direction of our Malaysia monetary policy. The short-term and long-term interest rates at other maturity period will continue determined by the market and mirror the whole demand and supply conditions as well as interest rate expectations in the financial market.
The Overnight Policy Rate is an overnight interest rate set by the Bank Negara Malaysia. The main used is for the monetary policy instruction and is a direction and target rate for the day-to-day liquidity operation of the Bank Negara Malaysia. The Overnight Policy Rate of our country raise by Bank Negara Malaysia 25 basic point on 9 July 2010 that mean from 2.5% to 2.75%.
The new issuances of Bank Negara Monetary Notes (BNMN) will issue either on a discounted based or a coupon basis which are depended on the investor's demand. Discount based Bank Negara Monetary Notes (BNMN) will use the same market convention and tools to traded same as the existing Bank Negara Bills (BNB), Malaysian Treasury Bills (MTB) and Bank Negara Negotiable Notes (BNNN).
The coupon based Bank Negara Monetary Notes (BNMN) will assume the market condition and terms of Malaysian Government Securities (MGS). As information, the Bank Negara Monetary Notes (BNMN) was started issuance on 8 December 2006 and the issue size of Bank Negara Monetary Notes (BNMN) was RM 1 billion.
Bank Negara Monetary Notes (BNMN) is traded on yield basis which mean discounted based rate. Bank Negara Monetary Notes (BNMN) is traded based on remaining tenure bands. For example, the Bank Negara Monetary Notes on band 4 is need 68 to 91 days to maturity. The standard trading system of Bank Negara Monetary Notes (BNMN) is cost RM 5 million. In the secondary market, Bank Negara Monetary Notes is very active in trading.
The main objective of Bank Negara Monetary Notes (BNMN) is to raise ability, capacity, competence and efficiency to excess liquidity in the financial market system. It also will impact on our country domestic financial markets situation. Besides that, the issuances of existing Bank Negara Bills (BNB) and Bank Negara Negotiable Notes (BNNN) will be stopped in the Malaysia financial market. In other side, all maturing issues will be replacing by Bank Negara Monetary Notes (BNMN) with the appropriate condition and maturity terms.
The new issuances of Bank Negara Monetary Notes (BNMN) will be conducted by competitive auction through the Principal Dealer. The Principal Dealer is introducing by the Bank Negara Malaysia on 1989. Principal Dealer is a part of initiative of develops the primary and the secondary market of the public debt securities. Principal Dealer tries to build up a stable demand for Malaysia government, Bank Negara Malaysia and Bank Negara Malaysia Sukuk Berhad to issuance their commercial papers in the secondary market more liquid.
As we know that nowadays the Islamic finance and the role played by the Islamic banks and financial institution is getting stronger and important in Malaysia. Due to this the Bank Negara Malaysia is introduce the Islamic Principal Dealer system (i-PD) on 2009. The Bank Negara Malaysia is select few banking institution as both Principal Dealer and Islamic Principal Dealer based on the set of criteria which depend on their ability on transfer larger volume transaction, participation in secondary market and their overall risk management.
List of the Principal Dealers
Ambank Berhad
Hong Leong Bank Berhad
Citi Bank Berhad
HSBC Bank (Malaysia) Berhad
CIMB Bank Berhad
Maybank Berhad
OCBC Bank (Malaysia) Berhad
Public Bank Berhad
RHB Bank Berhad
Standard Chartered Bank (Malaysia) Berhad
United Overseas Bank (Malaysia) Berhad
The Royal Bank of Scotland (Malaysia) Berhad
Islamic Principal Dealers
Affin Islamic Bank Berhad
AmIslamic Bank Berhad
Bank Islam Malaysia Berhad
CIMB Islamic Bank Berhad
Hong Leong Islamic Bank Berhad
Maybank Islamic Bank Berhad
Cagamas Papers
The Cagamas Berhad is the National Mortgage Corporation and the daily operation business is to promote business of the secondary mortgage market in Malaysia. Cagamas Berhad issues financial notes, bonds and also Sanadat. Sanadat is an Islamic bond. Cagamas Berhad was established in 1986.
Cagamas Berhad has diversified their business form from that of a national mortgage corporation seeking to help Malaysians with affordable housing and so that become a leader in securitization.
Cagamas Berhad issues debt securities to finance and support the purchase of the housing loans and other consumer receivables from financial institutions such as banks, financial companies and non-financial institutions such as Employee Provident Fund (EPF). The supply of liquidity at a reasonable cost to the primary lenders of housing loans encourages further financing of houses at a comfortable and reasonable cost.
On other side, the Cagamas Berhad model is regarded by the World Bank as the most successful secondary mortgage liquidity company and Cagamas Berhad is the leading issuer of debt instruments and the largest issuer of triple A (AAA) debt securities as well as the important Islamic Sukuk issuers in the world.
The Cagamas Berhad's debt securities continue to be appointing the highest rate of triple A (AAA) by Rating Services Berhad (RAM) and MARC-1 by Malaysian Rating Corporation Berhad to strong their credit quality.
Corporate Profiles
Board of Director
The Board of Directors is responsible for the formulation and managing of the Company's general policies. There is also a Board Executive Committee comprising three directors who act for the Board between Board Meetings. The chairman of the board is Datuk Oii Sang Kuang and the other directors are:
Tan Sri Datuk Sri Tay Ah Lek
Datuk Mohd Razif Abd Kadir
Datuk Albert Yeoh Beow Tit
Mrs. Yvonne Chia
YM Tunku Afwida Tunku A. Malek
Mr. Tang Wing Chew
Mr. Cheah Tek Kuang
Datuk George Ratilal
Dr. Roslan A. Ghaffar
Cagamas Berhad had completed its internal restructuring exercise and with effect from 2 January 2008, Cagamas Berhad, Cagamas MBS Berhad. Cagamas SME Berhad and BNM Sukuk Berhad have become wholly-owned subsidiaries of Cagamas Holdings Berhad. Based on the shareholder as at 30 April 2010, Cagamas Holdings Berhad has 150,000,000 numbers of shares 100% shareholding.
Vision
The Vision of Cagamas Berhad is to be the leading securitization house in Malaysia and in the region and to actively support the development of the Malaysia capital market and financial market too in the future as well.
Group Corporate Structure
Diagram 3: ETP Infrastructure
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Cagamas Bonds and Notes
Cagamas operate its purchases of loans and debts through the issuance of Cagamas debt securities. There have five types of debt securities which issued by the Cagamas Berhad to support its loans and debts purchased under the facilities for housing loans, industrial property loans, hire purchase and leasing debts, Islamic house financing debts and Islamic hire purchase debts are as follows:
Cagamas Fixed Rate Bonds
These bonds have tenures from 1 year to 10 years. It carries a fixed coupon rate which can be determined based on the tenders submitted by the Principal Dealers. Interest on these bonds is paid half-yearly and the redemption of the bonds is at nominal value together with the interest on a maturity period.
Cagamas Floating Rate Bonds
These instruments have tenure of 10 years and an adjustable interest rate pegged to the 3 month or 6 month KLIBOR. The interest rate will be reset every 3 or 6 months. On other hand, the interest will be paid at every 3 or 6 month intervals.
Cagamas Notes
The Cagamas Notes are short-term instruments which the maturity period is between 1 to 12 months issued at a discount based from the face value. The other features of these notes are similar to the Malaysian Treasury Bills. They are redeemable at their nominal value upon maturity.
Sanadat Mudharabah Cagamas
These are Islamic bonds issued under the Islamic principle of Mudharabah (profit-sharing) to finance the purchase of Islamic house financing debts which were granted on the concept of Bai Bithaman Ajil and the purchase of Islamic hire purchase debts which were granted under the concept of Ijarah Thumma Al-Bai.
Dividend based on a pre-determined profit sharing ratio is payable semi annually and they are redeemable at par on maturity period except there is principal decreasing. This instrument has tenure of 10 years.
Sanadat Cagamas
Sanadat Cagamas is an Islamic bond which issued under the Islamic concept of Bai Bithaman Ajil to support the purchase of Islamic house financing debts and Islamic hire purchase debts. The bond dividend is payable semi-annually and the bonds are redeemable at par together with the dividend on maturity period. These instruments may have tenure of 10 years.
Where permitted by the respective trust deeds, the Cagamas Berhad may at any time purchase its debts securities and the repurchased debt securities shall be cancelled according to the requirements of the trust deeds.
Benefits of Selling Loan and Debt to Cagamas
There have many benefits of selling the loan and debt to the Cagamas Berhad. There are:
Liquidity requirement savings and statutory reserve
The financial institution profits that get from the sale of the housing loan and Islamic house financing debt to Cagamas Berhad exempted from the liquidity requirement. On other side, the fund obtained from the financial institution from the sale of industry property loans and hire purchases are half of the sale proceeds will be included for the computation.
Amount taken off from balance sheet
The amount of housing loans sold to the Cagamas Berhad can be taken off from the seller's balance sheet.
Ready access to liquidity
Ready to buy loans and debts at a Cagamas rate and lenders have ready to access liquidity.
Increased profits
Lenders can increase their profit by selling their long term loans and Islamic housing loan to Cagamas Berhad.
Reduce maturity mismatch
Cagamas Berhad provided lenders to access to medium and long term funds and suitable with their tenure long term assets.
Source of medium and long term funds
Cagamas' credit standing allowed borrowing a large sum of medium and long term funds in capital market at low cost.
Reduced exposure of interest rate risk
Lenders are given flexibility to control and manage their interest rate risk.
Diversification of funding base
Cagamas Berhad purchase facilities provide lenders ways to diversify their funding base.
Purchase without recourse (PWOR)
The Purchase without recourse (PWOR) is a contract where the Cagamas Berhad purchases the conventional and Islamic receivable without any recourse of default risk. There have some key features of PWOR:
Outright sell to Cagamas Berhad and no recourse of default risk.
Islamic and conventional
Housing and auto financing
Pricing from par to premium which depend on the quality of the assets
Standardized structure and documentation
Cash purchases by Cagamas bonds
Excess spread paid to seller as service fees
Seller will become servicer for loan sold
PWOR Mechanism
Cagamas
Originator
Originator sell loan to Cagamas on no any recourse basis. After that Cagamas will pay cash or bond as consideration for loan. After sale, originator will continue to service customer and remit repayment to Cagamas. Last, Cagamas will pay service fees to originator as upon receipt of loans.
Private Debt Securities
Private debt securities are short and long term debt securities that issued by private companies based on conventional or Islamic principle. In 1980, Bank Negara Malaysia was the only Malaysia Government agency which is responsible to manage and control for the regulation of corporate bond issuance.
Private Debt Securities are issued by private companies to increase their company debt capital and all of this is law under the Securities Commission Act 1993. A trustee is appointed by the Issuer to make sure that the bond holders, loan stock holders or debenture holder's interests are safe guarded at any time and location. The trustee also needs to make sure that all compliance issues are complied and stated in the trust deed.
The corporate bond market registered an average annual growth rate of 8%. Corporations should have changed their attention, focus and power to the bond market as a viable alternative to bank borrowings and the stock equity market. Besides that, the investors are also able to adjust or control their risk return profile by the way of trading of various securities available in the financial market.
Private debt securities can concluded as securities that issued to a private company through some classify of organization with the objective of eventually being paid off with the additional interest, for example a credit card account. Furthermore, corporate debt securities are securities which are issued to a company and represent a certain portion of that company's assets.
We know that, private debt securities are a type of financial stage in which an issuer (also known as a creditor) provides an asset to a borrower with the intention of receiving a repayment of the funds. In this, it is contact form that represents money owed to another person or party as well. For examples, vary types of bonds, documents such as debentures, or commercial paper money issued by a central bank or government. All of these debt securities are usually backed by some arrange of legal standing. However, some of the countries do not manage the practice and allow creditors to issue statements privately.
All Malaysia Governments level issue debt securities in the form of bonds. These are essentially promissory notes which make sure a repayment with interest to individuals after period of time. The concept of a debt security is important and useful to the continued function of the global economy.
The financial institutions with capital provide for individuals and companies in term of need of supply or support with the ability to purchase the products and services on credit. The creditor issues some arrange of binding document designed to represent the debt accrued. These documents are considered to be usefulness in certain value and requiring the individual or group to repay the debt according to the terms and condition of the agreement as well.
Private Debt securities also can be traded like goods or services to allowing them to represent potential and effective economic value. In this way, a bank or private company can issue some arrange of credit to create a debt security document and sell it to another people for the right to collect the repayment value. Private Debt securities therefore can essentially same to the exchange of the money.
The Approval Process of Private Debt Securities in Malaysia
The Security Commission responsible of the issue and offer of private debt securities in Malaysia. Security Commission is the main approving authority for prospectuses. The Security Commission will complete its evaluation within the following duration of time periods:
The approval period for corporate plans involves the issue and the offer of both conventional and Islamic private debt securities is within 14 working days from the date of submission.
The approval period for corporate plans involving asset backed securities are within 28 working days from the date of submission.
Projects which involving the issue and offer of Private Debt Securities by multinational financial companies or supreme relation financial institutions, the eligible issuers issues structured products are treated as being consider approved upon the complete submission receive of the plans to the Securities Commission.
The Security Commission will make sure that all submissions for the conventional Private Debt Securities and Islamic securities plans issuance are in compliance with the right procedure. Material information is disclosure and strong important is fully given to prospective investors and help them in their investment making decision as well.
The Security Commission will make sure that all issuances of Islamic securities are under the Islamic Shariah principle and match with the principles as approved by the Malaysia Shariah Advisory Council. Next, the Security Commission consultations are very important and encouraged application of Shariah principles is complicated.
Issuers are encouraged to internationalize the process by forming the issuance based on globally accepted Islamic Shariah principles to mark and entrenching our Malaysia's image ability to become the most quality, advanced and developed Islamic financial centre in the global financial market in the future. There is a potent internal challenge process to make sure that Private Debt Security application process assessing completely, firmness, transparency, responsibility and accountability. The communication between the principal advisers and the Security Commission is important in right from the consultations stage through to post decision meetings.
Asset Backed Securities (ABS)
Asset Backed Securities (ABS) are securities backed by assets such as mortgages, loans, receivables, etc and are issued by private or Malaysia Government relation corporations (GLCs). Asset Backed Securities are also issued on an Islamic basis in Malaysia.
Pooling or combine the assets transfer to financial instruments can allow them to sell to general investors and this process is call securitization. Securitization can allow the investment risk diversify of the underlying assets due to each security will represent a portion of the diverse pool of underlying assets total value. The combination of underlying assets can include common payments from credit cards, auto loans, and mortgage loans, to esoteric cash flows from aircraft leases, royalty payments and movie revenues.
Besides that, Asset Backed Securities are actually same with the mortgage backed security but excluded that the securities backing it are assets such as home equity loans, auto loans, equipment leases and loans, credit card receivable, company's receivables, aircraft leases, trade receivable, stranded cost utilities, royalties and others which is not mortgage based securities.
A main advantage of asset backed securities for loan originators is they are combining together in pooling process of financial assets that is difficult to be traded in the existing form and condition.
Next, they can be transforming into instruments that sold freely in the capital markets throughout the pooling process which together with a large portfolio of the illiquid assets. The mooting of these securities into instruments with different risk on theoretically and get back the profiles assisting marketing of the bonds to the investors with different risk craving and investing time.
Asset backed securities also provide loan originators with some advantages which are:
Sell these financial assets into the pooling process to reduce the capital risk weighted assets. This way can increase their capital and empower them to start their loans.
Asset Backed Securities also can lower the investor's risk such as when the pooling process of assets performance is very poor then the owner of Asset Backed Securities (which is the issuer or guarantor) should pay the price of smashup rather than the loan starter.
When the loan originator or the issuer is made to pay the same price, it cost to redeveloping the lending traded and reform the others profitable operating assets of the loan originator as well as the basic of the same and consolidation issuance in the form of merging or consolidation.
The lender of last resort will counted and contained the risk from time to time by switch auctions. Furthermore, the other financial instruments that used to reinsert the bad loans to keep over a longer time period to the suitable buyers over a certain time of period is based on the instruments available for the bank to taken out its business as licensing granted to the particularly banks. Lastly, the risk also can be diversifying by using the alternate geographies, vehicles of investments and apartment of the bank which is depend on the class and quantity of the risk.
