Thursday, January 14, 2016

1MDB, Malaysian Bonds, Moody, Credit Rating - More Worries for Malaysians?

It was really tough understanding the 1MDB, the effect of Malaysia being the guarantor, Bonds, 'Sukuk', Moody Ratings, etc - so I made an effort to get a better understanding. Anyway, what is stated below is an attempt by me to simplify the issue...but best do your own further study/verification...

When Moody brought down Malaysia's sovereign rating - risk of BIG PROBLEMS increases... 

Well, for a start, we need to understand BONDS - which are very different from Shares


A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.

How Bonds Work

When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing other debts, they may issue bonds directly to investors instead of obtaining loans from a bank. The indebted entity (issuer) issues a bond that contractually states the interest rate (coupon) that will be paid and the time at which the loaned funds (bond principal) must be returned (maturity date).

So, the Investor buys a USD1,000 bond from company 1MMM, which has an interest rate of 5%, and a maturity date 1/1/2018.
So, annually 1MMM will have to pay 5% to the investor, and at the maturity date will be able to get back the said USD1,000. 

Now, if the credit rating goes down, 1MMM may end up paying more that 5% annually -
Bonds are different from shares - as shares can increase in value or decrease in value depending on the market, and could be sold off at any time - and what you get is the value of the share at that particular time. There is no obligation for the company to buy back its shares..

Bonds - well, on maturity date, the bond holder will recover his/her USD1,000 from the company that issued the BOND, or alternatively go after the GUARANTOR if the bond issuer cannot settle the debt. {See also:- Gov’t has guaranteed RM177.8b worth of GLCs' debts? WHY? GLC not government-owned?}

What fluctuates with bonds, is the annual interest rate payable to the bond holder - and this depends on the credit rating assigned to the company - by essentially 3 rating companies, being Moodys, Standard and Poors, and Fitch.
Credit rating is basically how secure the situation that the investor will get back his money... When, the credit rating drops - then the risk of getting the money back increases. [We just read that Moody has dropped Malaysia's credit rating ...and this is not good]  

When credit rating drops, the risk of recovering the debt increases, and the bond issuer ends up having to pay higher...and higher interest...[and maybe even an increment of the bond value] - all this to prevent the 'loan giver'(the bond holder) assurance "hold on, we are good and will not default - your money is safe...'

The stronger the issuer's financial position the higher the credit rating assigned to the company.

The top rating is "10" which is for AAA ratings -- the gold standard. These securities set the benchmark for safety and all other bonds are rated relative to the safety of owning them. 

The ratings table is divided into two primary categories. "Investment grade" and "speculative" grade ratings.

The risk of owning a security increases as you go down the rating scale. The risk of the security is that the issuer will renege on their obligation to repay you the principal amount of the bond and the interest that was promised. This is called "defaulting". 

Ratings are opinions about the risk of an investment. Ratings do not indicate anything about the price of a bond.
Bonds like normal loan or financing need guarantees. In few instants Government has provide the sovereign guarantee. Provider of these guarantee carry contingent liabilities (no exposure if everything is ok). Now let see how Moody has interpenetrated this scenario. 

Extract from Moody's report.
Conversely, a significant worsening in Malaysia's debt dynamics—possibly arising from an inability to manage the impact of lower crude oil and agricultural commodity prices—on the fiscal accounts or the crystallization of large contingent liabilities, could exert downward pressure on the rating. 

With the rating under pressure (Malaysia not so bad yet) it could lead to the following:-
This happened in Dubai and Argentina's Financial crisis.
Really hope that our Malaysian government and our 'peoples' representative' will take the time to explain this issue to all of us in a simple and clear manner.
Our Prime Minister and this BN government should really be more accountable and transparent  - TELL US NOW IF WE MAY BE IN BIGGER TROUBLE SOON - AND THEN AT LEAST WE CAN ALL BE PREPARED AND DO THE NEEDFUL... 
How much BONDS did 1MDB and its subsidiaries issue?
How much BONDS did other Malaysian GLCs issue?
How many of these companies did Malaysia stand as Guarantor?
What is the effect of the decline in credit rating by Moody? How much extra money will be have to pay - just to ensure these loan holders that their money is still safe?
* SUKUK  - well, that really is Syariah compliant Bonds..

Moody’s cuts Malaysia’s sovereign rating outlook due to growth risks

Moody’s says the change in outlook reflects a deterioration in Malaysia's growth and external credit metrics due to external pressures over the past year. It affirmed Malaysia's issuer and senior unsecured bond ratings at A3. – The Malaysian Insider filepic, January 11, 2016.  
Moody’s says the change in outlook reflects a deterioration in Malaysia's growth and external credit metrics due to external pressures over the past year. It affirmed Malaysia's issuer and senior unsecured bond ratings at A3. – The Malaysian Insider filepic, January 11, 2016. ​ 
Moody's cut Malaysia's sovereign rating outlook to stable from positive today due to the negative impact of changes in the external environment on the Southeast Asian economy's growth.

The ratings agency said the change in outlook reflects a deterioration in Malaysia's growth and external credit metrics due to external pressures over the past year.

It affirmed Malaysia's issuer and senior unsecured bond ratings at A3.

Moody's said the changes in the external environment have reduced government revenues over the period. "Those environmental changes have also undermined Malaysia's external position, with large capital outflows, a falling current account surplus, sharp exchange rate depreciation and falling reserves," the ratings house said in a report.

Alongside a worsening external environment, material domestic imbalances continue to pose a risk to growth and household debt levels remain high, it added.

Despite progress in relation to fiscal consolidation, Moody's expects Malaysia's public debt burden and debt affordability will see only limited improvement.

Today, Malaysia's November industrial production slowed to its weakest pace in 16 months, hurt by weaker global demand and a decline in mining production.  – Reuters, January 11, 2016.
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Does Moody's downgrade or revision really matter?

Dzulkefly Ahmad     Published     Updated     0 comments
COMMENT Senator Abdul Wahid Omar, Minister in the Prime Minister's Department, said that Moody’s Investors Service’s revision of the country's sovereign rating outlook to stable from positive is not a downgrade.

He insisted that it is a 'revision' in the outlook which is reflecting the current global economic scenario.
Moody’s has affirmed the government of Malaysia’s issuer and senior unsecured bond ratings at A3 and changed the outlook to stable from positive.

In fact Moody’s revised the ratings of three other government-linked companies - Malaysia Airports Holdings Bhd, Tenaga Nasional Bhd and Penerbangan Malaysia Bhd - to stable from positive.

Does it really matter whether the minister admits it as a downgrade or a revision?

But what is important to the business community is whether this action on rating by Moody's and all other rating agencies later, will impact adversely on the cost of borrowing for the business community in Malaysia.

Bloomberg has actually reported that borrowing costs on Islamic bonds will climb to a record.

The Maybank Islamic Asset Management, according to Bloomberg, said that benchmark sukuk yields will rise to five percent.

That is what Wahid should be concerned about than to be pedantic on terminologies of a 'downgrade' or a 'revision'.

The outlook for higher borrowing costs has also hurt Malaysia’s Islamic bond sales in 2015.

This trend is set to stay, as opined by investment banks like RHB Investment Bank.

That is what is arguably worrying to the business community and particularly the sukuk and Islamic Financial market.

DR DZULKEFLY AHMAD is secretary of Gerakan Harapan Baru.

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