Malaysia Capital Markets Deal
The synthetic securitisation of loans to small and medium-sized enterprises by Cagamas, Malaysia’s national mortgage company, broke ground in a number of ways – not only was it the country’s first securitisation of that class of assets, but it was also the first synthetic deal from the country. For those reasons, it is IFR Asia’s Malaysia Capital Markets Deal of the Year.
Over the years, Malaysian national mortgage corporation Cagamas has developed strong recognition and investor support. That support was amply reflected in the response to its deals throughout 2007, especially during times when other originators had to defer issuance after the credit market tanked in August.
Cagamas has been a prolific promoter of securitisation and executed a number of path-setting MBSs in 2007, but it was its synthetic securitisation of M$600m (US$177m) of SME loans through wholly owned subsidiary Cagamas SME that stood out. It was both the first synthetic securitisation from Malaysia and the first securitisation of SME loans from the country.
“This programme has set a new standard in the country, and at the same time positioned Malaysia as a model for SME funding,” said Cagamas chief executive Steven Choy at the time.
Cagamas’ breakthrough was to link SME loans to the capital markets thereby improving the entity’s funding opportunities and cutting the sector’s reliance on government funding. Furthermore, it has provided a tool for the banking system to manage its risk in the SME sector more efficiently. At the same time, it freed up capital so that banks could increase their lending to the sector. It is often forgotten how significant a role SMEs play in the Malaysian economy – they account for around a third of the economy and getting on for two-thirds of employment.
Most impressively of all, the deal arrived in the middle of the credit crunch, closing on October 9.
Cagamas SME offered investors two out of the three tranches of five-year credit-linked notes. Cagamas acted as the senior swap counterparty and transaction administrator. Maybank, the country’s largest bank in terms of assets, was the originator of the SME loans, and Credit Guarantee Corp Malaysia (CGC) took M$45m of Class C notes (rated BBB3 by RAM) and M$60m of unrated mezzanine notes.
Michael Oh-Lau, head of debt capital markets at Aseambankers, said the most challenging aspect of the deal was the education process involved in explaining the complexities of the deal to Maybank and to CGC.
Investors – rumoured to have been insurance companies for the most part – were given the chance to participate in the M$75m Class A tranche (AAA) and the M$30m B tranche (AA3). Aseambankers Malaysia and Citi were the joint lead arrangers. The issuer entered into a credit default swap with Maybank on a portfolio of SME loans. Under the terms of the swap, Maybank also pays a premium to the issuer for credit protection.
Maybank will also enter into a guarantee with CGC. Under the terms of the guarantee, CGC undertook to pay Maybank up to 10% of the total transaction size of M$600m for any losses on the SME loans where the threshold amount (the first loss piece is 5% of the deal) has been exhausted.
To date, this has not been an issue. “The default rate is less than 2% – and since August [2007], so far there has been no claim,” added Oh-Lau, speaking at year-end 2007.
The deal allowed for transfers of credit risk for potential capital relief, while retaining the loans on the books of the originator. This will improve the originator’s return on capital and improve its capacity to increase exposure to the SME sector.
CGC’s unusually deep involvement in the deal reflected the transaction’s importance. Retaining both the Class C notes and the mezzanine tranches provided essential credit enhancement. CGC’s guarantee enables SMEs to tap the capital market rather than apply for direct funding.
Cagamas is said to be considering a number of similar deals – also synthetic. In November, it acknowledged that it was also pondering a Sharia-compliant version of the synthetic securitisation. But, as importantly, the deal has become a benchmark, and other Malaysian banks with large SME portfolios are looking to follow the model and launch similar structures.
Adrian Murdoch, Shankar Ramakrishnan