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Effective 1 Jan 2017 no mandatory requirement for credit rat

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by

Zhaqri Faruq

on 16 October 2014

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Transcript of Effective 1 Jan 2017 no mandatory requirement for credit rat

Prime Minister's Announcement
Effective 1 Jan 2017 no mandatory requirement for credit ratings

Effective 1 Jan 2017 International credit rating agencies with 100% foreign ownership are allowed to operate in Malaysia

What Is Rating Free Bond?
A rating-free bond market means that both good and poor credit quality companies can also go to the bond market to raise funds
Companies can issue bond without It offers investors a wider set of risk profiles about credit risk.
Standard & Poor’s credit ratings express the agency’s opinion about the ability and willingness of an issuer

Credit Rating
Credit ratings can also speak to the credit quality of an individual debt issue
Ratings are provided by organizations such as Standard & Poor’s, RAM and MARC
Each agency applies its own methodology in measuring creditworthiness and uses a specific rating scale to publish its ratings opinions

Credit rating agencies
Positive Effects of 100% foreign ownership
With more international Credit Rating Agencies participation will introduce
- a more competitive fee structure
- widen both expertise and the range of credit rating services
- encourage more foreign investment
With the foreign participation, local rating agencies will benefit by improving their own standard
With foreign participation, the credit rating gives better transparency and it helps the issuers price their bonds accordingly

Conversion Table for Moody's and S&P's
Come 2017, the mandatory requirement for bonds to be rated by credit rating agencies in Malaysia will be removed. The rationale for such a move is to deepen and broaden the corporate bond market in this country. Is this prudent and wise?

Positive Effects of 100% foreign ownership
Foreign corporations would be allowed to own 100% stake in credit rating agencies
Investors will benefit with foreign rating agencies entry
- The entry of international agencies will further enhance the quality and standard of rating services
- minimising the risk on bond investments

No mandatory requirement for Credit Rating
Investors will incur additional investment
- Need to send their own analyst to do the assessment study.
- Need to do their homework without relying on the credit agencies
Without credit ratings these companies can issue bonds at faster pace at low cost.
Bond issuers will still seek to credit-rate issuances to provide confidence to the market

Effective 1 Jan 2017 no mandatory requirement for credit ratings

Effective 1 Jan 2017 International credit rating agencies with 100% foreign ownership are allowed to operate in Malaysia


Effects (Disadvantages) of removing the credit rating
The retailer investors is a not yet mature market is assessing and valuing the bonds
If the market is not mature enough by 2017, there may not be sufficient take-up because the investors are wary of not having a credit rating attached to the bonds
This also affects the small and medium firms that are now able to enter the liberalised market

Disadvantages
It will not benefit the less reputable companies
- The reason is because they are lacking in track records
- Investors would not want to invest in such companies

Big investors would prefer larger and more reputable companies to invest especially with track record.

Bond Market Statistics
Bond Market Statistics
Topic
Rating Agency Malaysia Bhd (RAM)- 1990
- comprises commercial banks, merchant banks, finance companies and two other institutions, The Asian Development Bank and IBCA Ltd

Malaysian Rating Corporation (MARC)- 1995
- comprises major life and general insurance companies, stock brokers and discount houses

Conclusion
While some market players have hailed this liberalization as a positive development, such a move can have negative consequences

There have been instances of rating agencies not providing accurate and timely alerts on risks and defaults. Investors have been known to get burnt in the past

Liberalization is good only when there is good governance — both in the public and private sectors
Full transcript