Sunday, August 23, 2009

Danajamin – multi-billion losses in the making?

The Star on 19 August reported Danajamin Nasional Bhd, the national financial guarantee insurer, has received 2 applications for credit enhancements to raise RM8.4bn of bonds.

Danajamin was set up in May 2009, as part of the “RM60bn” stimulus package announced by the government in March, to ensure that businesses continued to have access to bond market financing.

Here’s what an interested reader says:

“This Danajamin is a disaster waiting to happen.

Bank Negara governor Tan Sri Dr Zeti says "it provides credit enhancements for viable corporations to raise financing from the bond market". But in that, there is a contradiction. If it is viable, then why need enhancements?

This sort of credit enhancement features are typically for bad companies, which cannot access the loan or the bond markets by themselves. The REASON they cannot access these 2 markets is because they are NOT credit worthy.

Banks are experts in credit analysis. In fact, that is the bread-and-butter of lending-based banking. If the banks themselves, who are experts, deem the companies not suitable for loans, then what extra expertise or knowledge does Danajamin have to decide to bear that risk?

There are 9 local banks in Malaysia, 3 Arab banks, 2 Spore banks and 4-5 foreign banks (HSBC, ABN, StanChart etc etc). Collectively, 20 banks can’t be wrong, and Danajamin correct. Secondly, since these companies are not credit worthy, they are prone to default if there is any downturn in the economy.

As such, Danajamin will be laden with non-performing loans (NPLs). Banks have the means to monitor and modify NPLs. How will Danajamin do so?

As I said above, unless Danajamin can claim that they have a better form of credit enhancement than all the 20 banks in the system and that their risk management of potential and actual NPLs is also superior, this is a disaster waiting to happen. Assuming a 20% NPL rate of MYR 18.4 billion is a massive number. Let us cross our fingers that there is no double dip recession in the US.”

To which I would add, Dr Zeti herself was quoted as saying, ““The recent narrowing of spreads between benchmark issuances and triple A rated papers indicates that risk aversion has now eased,” and demand for higher-yielding securities was also beginning to rise, ahead of the recovery in the global economy.

Danajamin might have been justified when markets were frozen. But if markets are recovering and functioning again, it has no raison d’etre.

Note that the RM8.4bn was just for two deals – so we’re talking a massive RM4.2bn size per issue. From my experience, any issue of this size would would be inundated with bankers vying for a slice of the action – for the sizeable fees and the bragging rights.


Anonymous said...

reposted from : YB Mr TOny's blog

What DAP stands for? Saw a book by the Honorable LKS : TIme Bombs in Malaysia. a statement of "we are in trouble (There is nothing I could do about it)" message. Regretably that is the rhetoric message. Mere words.

My Sharing:

Keep your friends close.
But keep your enemies closer.

Your political adversary mentioned a truth:

MCA Deputy President Datuk Seri Chua Soi Lek on party president and Transport Minister Datuk Seri Ong Tee Keat's "conspiracy theory" about a RM100 million campaign to destroy MCA. (Source: Malaysian Insider, Soi Lek asks Tee Keat to keep MCA out of tiff with Tiong)

"If you say there is a RM100 million campaign to topple him, the message is that MCA members only look for money — no money no talk. At the end of the day, people
-----support politicians based on their performance." (Dash ---- marks added)



Still seat of pants - critiques?


Anonymous said...

Another fund to shore up crony companies?


ZeuS said...

After two years of this post I strongly thinking that the prediction is true to the letter.

The company derails from its target to stimulate Malaysian bond markets and in a matter of facts the few company that was guaranteed by Danajamin is a company that have some and good relation with the so call Croony.

The business model sucks and there is no clear directions on which company they are trying to help giving the guarantees.

The Guarantees are given even to a company that was declared bankrupt now thats a good after taste.

No profits nor stimulation to the bond markets at all but they are only good in helping out croonies company. Which is of course absurdity at its best.