General
1. What is financial guarantee insurance?
Financial Guarantee Insurance is a form of guarantee/insurance for bonds issuance where the provider of the Financial Guarantee Insurance promises to make good of the coupon (or "interest") and principal payment to the bond holders on behalf of the issuer should there be a default or missed payment.
About Danajamin Nasional Berhad
2. What is Danajamin Nasional Berhad?
Danajamin Nasional Berhad (Danajamin) is Malaysia’s first Financial Guarantee Insurer (FGI). We were established in May 2009, as part of the RM60 billion economic stimulus package announced by the Malaysian Government on March 2009. The establishment of Danajamin forms part of the on-going effort by the Malaysian Government to ensure the continued flow of credit in the financial system to businesses to boost economic activities in the country.
The establishment of an FGI has long been proposed in Bank Negara Malaysia (BNM)’s Financial Sector Masterplan. The FGI is envisaged to contribute to the development of the country’s bond market by spreading the risk from the banking sector and providing greater access to fixed rate funding of longer maturities.
As the country’s first FGI, Danajamin’s primary objective is to provide Financial Guarantee Insurance (for private debt securities) or Al-Kafalah Guarantee (for Islamic securities), to help Malaysian companies access long-term capital at reasonable rates. The insurance (or "wrap") is available for securities issued by investment grade companies (defined as rated BBB or higher by a Malaysian rating agency).
Current global economic crisis has heightened risk aversion among investors, leading to diminishing demand for bonds, with interest limited to better quality debt papers (i.e. AAA and AA). As a result, companies that are lower-rated but still of investment grade are facing difficulty issuing bonds, thus denying them of capital for fresh investment. By providing the wrap, Danajamin enables the issuers to achieve AAA status (bonds will automatically be rated AAA with Danajamin’s wrap), hence increasing their chance of a successful issuance.
Another of Danajamin’s objective will be to help rejuvenate the local bond market by increasing issuance and restoring the confidence towards lower-rated issues. Many of these lower-rated companies are credit-worthy but the prevailing risk aversion has prevented them from tapping the bond market.
3. Who owns Danajamin?
Danajamin is jointly owned by Ministry of Finance Incorporated (50%) and Credit Guarantee Malaysia Corporation Berhad (50%).
4. Is Danajamin rated and what is its rating?
Danajamin has been rated AAA, the highest credit rating, by both Malaysian rating agencies, RAM Rating Services Berhad and Malaysian Rating Corporation Berhad.
5. Who governs Danajamin?
Danajamin is licensed under the Insurance Act 1996, is regulated and supervised by Bank Negara Malaysia (BNM) and is subject to prudential requirements governing its risk-taking activities and management of risks.
In addition, Danajamin has a very strong and experienced
Board of Directors, made up of mostly independent members. Of the 9 members, only the CEO has executive power.
6. How much bonds can Danajamin underwrite/guarantee?
Danajamin presently has a paid-up capital of RM1 billion and the Government has committed to another RM1 billion. Currently, Danajamin has the capacity to insure up to RM15 billion of investment-grade private debt and Islamic securities. This translates to a gearing of 7.5 times.
7. Does Danajamin charge for the insurance/wrap that it provides?
Yes, we do. Issuers will pay a premium/fee to Danajamin in return for the wrap.
8. Is Danajamin a finite-life agency?
No, it is not. Danajamin is intended to be an on-going concern, to continue to support the development of the country’s bond market.
9. Is Danajamin expected to make profit?
Danajamin is not commercially driven or profit-driven but as a regulated insurance company, we must remain profitable to safeguard our capital base and sustain our operations. The bulk of our income will come from the premium/fee we receive from wrapping bonds issuance.
Whilst we pursue income, we are mindful of the need to balance our drive for profit and the social responsibility that we have been entrusted with. At the same time, Danajamin places strong emphasis on risk management to ensure that we do not take on excessive risk in our pursuit for profitability.
10. Will Danajamin publish its financial statements and provide updates of its operations?
Yes, Danajamin publishes its financial statements and provides periodic updates of its operations on its website. All published information on Danajamin will be made available on the Company's website. To download a copy of the latest financial statements for the period ended 31 Dec 2009, please go to our Financial page.
Applying for Danajamin’s financial guarantee insurance
11. Who can apply for Danajamin’s guarantee?
All Malaysian-incorporated companies wishing to issue bonds may apply to Danajamin for financial guarantee insurance. However, Danajamin’s underwriting criteria require that these companies possess:
i) the ability to generate adequate cash flow to meet its debt obligations,
ii) strong corporate governance and good shareholder/management character,
iii) strong risk management practices and policies, and
iv) adequate security arrangement.
In addition to meeting the underwriting criteria, preference will be given to Malaysian incorporated companies seeking to raise funds for new productive on-shore investments that will provide a strong multiplier effect on the Malaysian economy. This is in line with the Government’s efforts to stimulate the economy.
Issues eligible for a Danajamin wrap must be issued by a resident of Malaysia, denominated in Malaysian Ringgit and utilized primarily for investments within Malaysia.
12. How does Danajamin calculate the premium?
The premiums will be priced based on the standalone credit rating and risk of each respective issue. An issuer with a higher standalone credit rating will enjoy a lower premium, and vice versa. It is intended that the premium offered by Danajamin will be competitive against the prevailing credit spreads available in the market and will facilitate the availability of long-term capital for the issuer.
13. Is it true that only companies that are of poor standing apply for Danajamin’s guarantee?
No, it’s not true.
Many of the companies that apply for Danajamin’s guarantee can obtain loan from financial institutions. However, some choose to issue bonds because bonds offer longer maturities (vs bank loans), with no fluctuation in the cost of funds. Bonds also provide the certainty of funds whereas bank loans are renewable subject to banks’ approval. For companies that are raising funds for projects with long gestation period, tapping the bond market will minimize financing costs, maturity mismatching and therefore reduce project risks associated with funding.
Nonetheless, given the current persistent risk aversion amongst the investment community, many face difficulty issuing bonds which under normal circumstances would have been easier. This is where Danajamin’s wrap adds value. With Danajamin’s wrap, bond issues will automatically be AAA-rated, making them more palatable to risk averse investors and with that, the companies will be able to raise the funding required. This is turn will help increase economic activities in the country.
On Danajamin’s part, we will exercise care and prudence in processing the applications we receive. We will be selective in providing our wrap and are inclined to support issuers that have demonstrated a strong track record of good corporate governance and risk management.
14. How does Danajamin ensure that the public funds provided for the Company’s operations is properly utilized?
Danajamin’s modus operandi and its use of public money require it to exercise high level of transparency and objectivity. The Board and management of Danajamin recognizes the need to conduct the Company with integrity hence has put in place a strong corporate governance framework.
To begin with, Danajamin has a strong and experienced Board. The Board consists of 9 non-executive directors comprising representatives from the shareholders and private sector with suitable qualifications and experience in relevant areas e.g. banking and financial industry. Together they bring depth and diversity in expertise and perspective to the leadership of Danajamin and allows for an independent and objective analysis of major issues. The Board is responsible for the policies and general affairs of Danajamin and retains full and effective control of the Company.
On evaluation of applications, it is mandatory that each application go through 4 levels of scrutiny internally (Underwriting Division, Risk Management division, Management Underwriting Committee and Board Underwriting Committee) and the system has been designed as such that no one person can approve any application.
To safeguard Danajamin’s interest, we will also impose on the issues that we wrap some rules related to governance (to ensure that all dealings are above board) and covenance (which include protections and ensures that companies do not get distracted from the original purpose of the issue). Continuous surveillance and monitoring will be done at Danajamin to detect any signs of risk and deterioration in the companies.
As a Government-owned company funded with public money, we are mindful of our responsibility towards our shareholders and the taxpayers of Malaysia and the need to be accountable. Danajamin is committed to run its operations in a transparent and professional manner with proper checks and balance in place.
