Published May 5, 2009

Cagamas looks to another RM7.5b

M'sia's largest buyer of home loans successfully taps bonds of RM4.5b

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(KUALA LUMPUR) Cagamas Bhd, Malaysia's largest buyer of home loans, will issue a further RM7.5 billion (S$3.2 billion) worth of bonds for the rest of this year, following the successful issuance of RM4.5 billion in the first quarter, The StarBiz reported.

'It has been an encouraging start despite the current economic slowdown,' the paper quoted Steven Choy, CEO of Cagamas as saying. 'We have been able to raise the money in eight issuances and close each issuance within one to two days.'

In fact, the amount issued by Cagamas in the first quarter this year is about half the total amount issued over the same period. The economic slowdown is likely to result in a lower issuance this year compared with the RM18 billion issued last year.

Cagamas papers are rated AAA and carry a higher yield than Malaysian Government Securities (MGS). They are mostly held for the entire duration of the bond issued by large insurance and asset management companies, pension funds as well as institutions.

Foreign take-up, especially by Singapore-based institutions, is about 15 per cent, with the bulk from local funds and institutions.

The outstanding amount of bonds issued by the group comes up to RM28 billion which, in terms of assets, is as big as some of the banks.

In relation to its purchase of mortgage loans, Cagamas has a strict purchase criteria. Moreover, its robust pricing analytics factors in the expected losses of these portfolios. The NPL rate stands at 2.2 per cent as at end February.

Unlike government bonds, Cagamas does not have a calendar for issuance but instead will consider factors such as interest rates and investor take-up. In view of tightening credit appetite, achieving a wide global network and continuous expansion of investor base is important.

Indirectly, Cagamas is owned by Islamic banks under the current banking groups such as CIMB, Malayan Banking and RHB Capital. There are currently no offers for equity participation yet from foreign Islamic banks.

A potential area for growth is in small and medium-scale enterprises (SME) loans synthetic securitisation where there is no cash involved. It is like a form of insurance. Every loan carries a capital charge. When banks sell off the risk to Cagamas, the capital charge is taken off their books.

Therefore, with the same size of capital, banks can fund SMEs several times more on top of funding through their own deposits.

In 2007, Cagamas pioneered the securitisation of SME loans via the issuance of RM600 million credit-linked notes by its wholly-owned subsidiary, Cagamas SME Bhd.

'In the current circumstances, where credit concerns are the biggest issue, investors demand more spread (higher interest).

'The securitisation of SME loans is likely to make a comeback when the market stabilises and investors return,' Mr Choy said.

Credit Guarantee Corp provides guarantees for SME loans, while under the recent stimulus package, further guarantees are provided by the government to help address the funding needs of SMEs.

At this stage, companies have different needs. For some which required cash like Malaysia Building Society Bhd, Cagamas provided a RM500 million facility via an asset-backed securitisation deal with three banks.

'It all boils down to good credit. Through Cagamas, MBSB was able to get the funding it required for its expansion,' said Mr Choy.

Cagamas bonds are in good demand and have never defaulted. It has been a serial issuer for the past 20 years.