Danajamin Nasional Bhd - 2010

MARC has affirmed its AAA insurer financial strength rating on Danajamin Nasional Berhad (Danajamin). The rating outlook is stable. The rating and outlook on the rating reflect Danajamin’s important role and status as Malaysia’s first and sole financial guarantee insurer (FGI) and its status as a government-sponsored entity. Licensed under the Insurance Act 1996 and regulated under the Insurance (Financial Guarantee Insurance) Regulations 2001, Danajamin was founded with a broad mission to facilitate market access for investment grade domestic issuers of private debt securities. Danajamin’s intended role in broadening the domestic bond market, its majority government ownership structure, as well as the regulators’ priority to maintain systemic stability are key factors in our assumption of high probability of federal support. The assigned ratings also incorporate its solid capital base, ample liquidity and conservative investment policy. Danajamin is capitalised at RM1.0 billion, giving it reasonable single-risk capacity and considerable liquidity resources as a start-up FGI. In addition, in the event of need, Danajamin can also call upon an additional committed capital of RM1.0 billion from the government. The FGI also intends to maintain a low-risk and highly liquid investment portfolio in line with its capital preservation investment objectives.

Danajamin had not underwritten any transactions for the financial year ending December 2009; the first Danajamin-guaranteed bond was issued in June 2010. However, the FGI was able to achieve an annualised ROE of 1.30% for FY2009 on the back of interest earned on the capital invested in bank deposits. According to Danajamin, as of end-June 2010, it has approved eight transactions for a total value of RM2.9 billion, translating to a leverage ratio of 2.9 times, which is well below its targeted leverage of 7.5 times. As of July 28, 2010, Danajamin had commenced to issue policies for two programmes amounting to RM335 million. Guarantees issued to both programmes entail exposure to the property sector. The current capital enables it to underwrite up to a maximum of RM7.5 billion based on its strategic leverage ratio of 7.5 times, without relying on reinsurance for capital relief. If the additional RM1.0 billion committed capital is called upon, Danajamin can underwrite up to a maximum of RM15.0 billion. 

Near-term challenges are likely to revolve around successfully executing its business plan which was subject to some operational changes, and establishing itself as a meaningful player in the domestic debt capital market. This could partly be attributed towards the difficulty in establishing a suitable ‘working model’ for the FGI considering the limited experience of such ventures in the ASEAN context. Furthermore, it remains to be seen whether Danajamin would be able to encourage lower investment grade companies, especially the non-traditional issuers, to opt for the debt capital market to raise funds. Danajamin’s advantage vis a vis the banks is that it enables access to funding with long maturity at fixed financing rate. That said, it is noted that Danajamin does compete with the banking sector in providing external credit enhancement to certain target market segments such as middle market corporates. In this regard, it remains to be seen whether Danajamin can deepen this segment of the credit-enhanced corporate bond market.

Meanwhile, MARC also opines that credit should be given to Danajamin for its remote loss underwriting strategy and for steering away from insuring unviable projects, which is an obvious challenge that most emerging market public-funded institutions face. Key considerations in MARC’s assessment of Danajamin’s credit profile going forward will be the progress made in establishing a sustainable business-model in the financial guarantee market, the observed effect of the legal, regulatory and supervisory framework on its evolving business risk profile and its insured portfolio characteristics and changes, if any, to its strategic focus and direction. 

MARC’s insurer financial strength rating on Danajamin incorporates assessments of willingness to pay as well as timeliness of payment, consistent with its obligation under its guarantee policies and contracts to provide unconditional, irrevocable and timely payment of principal and interest on scheduled debt service of insured securities.

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Challenges