[MARC] MARC affirms Danajamin's ratings with stable outlook - 31 Jul 2019

Posted Date: July 31, 2019

MARC has affirmed its ratings of AAAIS and AA+IS on Danajamin Nasional Berhad's (Danajamin) Senior and Subordinated Sukuk Murabahah of up to RM2.0 billion under its Sukuk Murabahah programme. Concurrently, the rating agency has affirmed the insurer financial strength rating of AAA and counterparty credit ratings of AAA/MARC-1 on Danajamin. The outlook on all ratings is stable. The one-notch rating differential between the Senior and Subordinated Sukuk Murabahah reflects the subordination of the latter to the senior obligations of Danajamin.

The ratings affirmation continues to reflect Danajamin's status as a government-owned financial guarantee insurer (FGI) and perceived high support from the government given its mandate to support the development of the Malaysian corporate bond market, both of which remain key factors in notching up the long-term rating to AAA from its standalone rating. The rating also incorporates Danajamin's strong capitalisation and liquidity position that helps temper concerns on the increased credit risk of some issuers in its guarantee portfolio. The stable outlook assumes that Danajamin will continue to benefit from strong government support; however, any increase in the overall risk profile would exert downward rating pressure on its standalone rating.

MARC notes that Danajamin has continued to face challenges in growing its guarantee portfolio, securing four new deals in 2018 with a total approved limit of RM561 million (2017: three deals, RM1.2 billion). At the same time, the FGI had cancelled eight guarantee facilities totalling RM2.2 billion due to full redemptions. This led to the total approved insured limit to decline to RM6.6 billion and outstanding guarantee amount to RM4.9 billion as at end-2018 (2017: RM8.3 billion; RM6.1 billion). The declining trend of Danajamin's guarantee portfolio has translated to lower premiums earned that have been offset by higher income from investments arising largely from a steady shift towards lower-rated and higher-yielding assets in the AA and A-rated bands (subordinated debt and Additional Tier-1 securities issued by a financial institution). This strategy suggests a shift in overall risk appetite from predominately AAA-rated securities in the recent past.

Danajamin has taken initiatives to mitigate further contractions in the guarantee portfolio as well as diversify its earnings base. The FGI expanded its guarantee scope to include providing guarantees on unrated issuances following its first on an unrated medium-term notes programme in 2018. For 1Q2019, two more guarantees were extended on unrated programmes; one related to the renewal energy sector and the other to the property sector.

Danajamin has also recently introduced a new guarantee product, namely Investor Guarantee (IG), which will provide investors with the option to decide on the extent of protection required from Danajamin. The bonds enlisted under the IG programme will be issued on a standalone basis, and investors will be able to approach Danajamin if a guarantee is required. It is also currently pilot-testing a second product, Financing Facilities Guarantees (FFG), which involves guarantees on bank loans and financing facilities to mid-sized corporates. As these initiatives are in the nascent stages, take-up is likely to be modest over the near term.

As Danajamin has a modest insured portfolio, standing at 23 issuers as at end-March 2019, it remains exposed to sector and single client concentration risk. The property sector (real-estate and property development) accounted for 20.5% of its total net outstanding guarantee amount while exposure to power and toll roads stood at 17.2% and 13.9%. Given the ongoing challenges in some key sectors, namely toll roads and oil and gas, the credit strength of the guarantee portfolio has weakened during the review period.

Given the FGI's expansion of its scope of underwriting activities and weakening credit quality of its guarantee portfolio, MARC expects Danajamin to exert tighter credit discipline through its risk controls to ensure the protection of shareholders' capital and its solvency. As at end-December 2018, it is well capitalised as reflected by a capital adequacy ratio of over 400%, significantly higher than the minimum regulatory requirement of 130%. Its net leverage ratio stood at 2.39x, well below the maximum leverage of 7.5x while liquidity has remained strong; its investment portfolio mainly comprises investments in short-term money market deposits and low-risk assets. These investments stood at 80.2% as at end-March 2019 of total investments.

For 2018, Danajamin's net profit rose 4.4% y-o-y to RM119.2 million. This was primarily due to higher investment income of RM94.5 million (2017: RM71.7 million), which was supported by the shift towards higher-yielding securities, a larger investment portfolio as well as the higher domestic interest rate environment in 2018. Net earned premiums stood at RM81.8 million, representing flat growth over the previous year.

Contacts:
Douglas De Alwis, +603-2717 2965/ douglas@marc.com.my;
Mohd Izazee Ismail, +603-2717 2947/ izazee@marc.com.my