Rating Islamic Financial Structures and Institutions

Malaysian Rating Corporation Berhad (MARC) is a pioneering Islamic rating agency, which has been at the helm of Islamic business for about 18 years. Winner of the Best Islamic Rating Agency 2014 by the prestigious Global Islamic Finance Awards (GIFA), MARC is a truly global Islamic rating agency with an impressive track record. Its CEO, Mohd Razlan Mohamed, is considered a key player in the Malaysian Islamic financial services industry. In this interview, we ask him to share with us his experiences and the success story of his business.

Please tell us about MARC, what it is, what it aims for and what are the different segments within it.

Malaysian Rating Corporation Berhad (MARC) is a Malaysian domestic credit rating agency. The agency commenced operations in 1997 as the country’s second domestic credit rating agency to provide local bond issuers and investors an alternative for their credit rating requirements. As Malaysia continued to stay on its high economic and industrial growth path during the mid-nineties, demand for debt capital market funding also grew in tandem with the banking system to satisfy our country’s developmental and corporate funding needs. While issuers sought credit ratings to improve the marketability and pricing of their securities, institutional investors relied on rating agencies’ independent assessments of credit risks to augment their own credit analyses.

MARC was established to meet the increasing supply of and demand for rated debt securities in tandem with the growth in Malaysia’s local-currency Ringgit bond market. Local financial institutions from the insurance and investment banking sectors became shareholders of MARC. The Malaysian sukuk market took off from 2002 onwards. These Shari’a-compliant instruments continued to gain prominence as can be seen from the increasing size and diversity of sukuk structures in the market, providing MARC the opportunity to provide its expertise in the rating of asset-based sukuk. We are proud of the fact that our hard work and perseverance have rewarded MARC with the recognition of being the ‘Best Islamic Rating Agency for 2014” by Global Islamic Finance Awards- GIFA.

MARC’s rating coverage extends to corporate finance, including financial institutions and insurance, structured finance, public finance, and infrastructure and project finance. MARC also publishes independent assessments of the creditworthiness of securities and issuers, providing investors with an independent source of opinion and research.

MARC’s vision statement, “Provider of Trusted Insights on Risk”, encapsulates our primary aim, focus and objective as a key information intermediary in the capital markets. Our passion to deliver our vision keeps us ticking. We take pride in delivering independent views and value-added insights on credit risk, which helps to reduce information asymmetry in a debt market context. Insightful credit opinions have a particularly important function in the current age of information overload.

Please tell us your ownership structure and who are your shareholders?

MARC is capitalised at RM20 million. We have a fairly diverse shareholder base comprising 29 institutions from major insurance companies, stockbrokers, and some investment banks in Malaysia.

Please share with us who are your clients? And how have you assisted them?

MARC has provided ratings on a wide range of Shari’a-compliant issuances by both domestic and foreign companies in the Ringgit-denominated sukuk market. MARC’s rating coverage extends to corporate and structured finance sukuk, project finance sukuk and Shari’a-compliant banking and insurance institutions.

MARC has completed 721 ratings, accounting for about USD140.6 billion (RM450 billion) in issuance value as of 30 November 2014. Over the years, MARC has rated many innovative sukuk instruments and structures. Among the notable sukuk that are rated by MARC include:

Projek Lebuhraya Usahasama Berhad’s (PLUS) USD7.3 billion (RM23.35 billion) Sukuk Musharaka Programme, an acquisition financing of a portfolio of toll roads in Malaysia, issued in 2012 remains to date the largest rated sukuk issuance by a single entity in the world.

Aman Sukuk Berhad’s USD3.1 billion (RM10.0 billion) Islamic Medium Term Notes Programme, an innovative public-private partnership (PPP) finance initiative for the development of the Malaysian police force facilities.

Malakoff Power Berhad’s USD1.7 billion (RM5.4 billion) Sukuk Murabaha Programme, an acquisition financing of a portfolio of independent power producers in Malaysia.

CIMB Islamic Bank Berhad’s USD1.6 billion (RM5.0 billion) Basel III-compliant Tier 2 Junior Sukuk Programme

Sime Darby Berhad’s USD1.4 billion (RM4.5 billion) Islamic Medium Term Notes Programme

TNB Western Energy Berhad’s USD1.3 billion (RM4.0 billion) Sukuk

Petronas Dagangan Berhad’s RM2.0 billion Sukuk Murabaha Islamic Commercial Papers and Islamic Medium Term Notes Programme

How are you different to other rating agencies like Moody’s etc., do you have an edge over them and how?

We are a full-service rating agency like the global rating agencies. However, our focus is on our home market and the ratings that we provide are strictly confined to the Malaysian national rating scale. The international rating agencies have a dominant presence in the international market and assign ratings on an international rating scale, in addition to local and regional scales in certain markets. Since its inception, MARC has accumulated over 18 years of experience in rating domestic entities and issues. Over the years, we have acquired a strong understanding of the local market and the industry dynamics and trends, which helps us to incorporate credit-related information from many sources into cohesive and forward-looking credit opinions. This gives us a home ground advantage in local corporate ratings.

You have worked on more than USD140 billion of issuances in oil and gas, plantation, infrastructure, power generation, construction, banking and finance, please share with us what are the most exciting projects MARC has worked on?

Our mandate to rate Projek Lebuhraya Usahasama Berhad’s (PLUS) USD7.3 billion (RM23.35 billion) Sukuk Musharaka Programme, issued in 2012 for the purpose of part-funding the acquisition of the selected Malaysian tolled expressways concessions and the Penang Bridge concession as well as to fund a planned capital spending, has to be one of the frontrunners in our list of most exciting projects we have worked on. Indeed, this programme remains to date the largest rated sukuk issuance by a single entity in the world.

We are also proud to have rated various high-profile power-related issuances in 2013, including Malakoff Power Berhad’s RM5.58 billion Sukuk Murabaha Programme for refinancing and working capital, TNB Northern Energy Berhad’s RM1.625 billion issue of Islamic securities to finance the development of a greenfield 1,071.43-megawatt combined-cycle gas turbine power plant in Seberang Tengah, Pulau Pinang, and Kapar Energy Ventures Sdn Bhd’s RM2.0 billion Sukuk Ijarah for working capital and to refinance the Issuer’s outstanding Bai’ Bithaman Ajil Islamic Debt Securities.

You have also rated some of the sovereigns. Please share your experiences. Further, how rating a sovereign is different? Share how you would rate a sovereign and what are the important factors.

MARC has assigned sovereign ratings to India (AA), Malaysia (AAA), South Korea (AAA), Indonesia (AA-), Singapore (AAA), Kuwait (AAA) and Hong Kong (AAA) since 2012.

The assignment of sovereign ratings entails going through the usual mill of soliciting feedback from the relevant authorities. However, given the potentially sensitive nature of this category of rating, government authorities would understandably be cautious in scrutinising our rating findings, with some taking considerably more time than others for this endeavour.

The rating of sovereign governments involves an analysis of relevant quantitative and qualitative factors. The quantitative analysis is dominated by macroeconomic analysis, which includes an analysis of the country’s economic strength and prospects, its fiscal sustainability and the sovereign’s debt burden. Data for this analysis is often readily available from the relevant central bank and/or government entities such as the Ministry of Finance or the entity responsible for collating and disseminating official statistics. Where readily available, MARC also obtains data and information from credible international entities such as the International Monetary Fund, the World Bank and the Asian Development Bank.

Qualitative analysis, on the other hand, is far more complex. It requires an in-depth understanding of the sovereign’s history, demographics, political and international environment and socio-economic trends. A sovereign credit rating is not only an assessment of the sovereign’s ability to pay, which is covered by the quantitative analysis, but it is also an assessment of a sovereign government’s willingness to repay in a full and timely manner. Ascertaining the willingness to pay would require drawing inferences to a sovereign government’s motivations, which can be influenced by multiple factors that at times may not be readily determined.

Receiving credit rating is vital for a company to raise funds effectively, please share with us some of the most exciting issuances you have worked on in Islamic banking and finance and how much of your portfolio is Shari’a compliant.

Among MARC’s key initiatives to support the growth and development of Islamic finance are introducing the first set of Shari’a-based rating scales and rating the world’s first global sukuk, Kumpulan Guthrie Bhd’s USD150 million Sukuk Ijara in 2002. The world’s first sukuk using the Musharaka structure valued at USD694 million (RM2.5 billion) by Musyarakah One Capital Bhd in 2005 was also rated by MARC. Since then, MARC has provided insights on sukuk rating through our publication entitled Rating Approach to Sukuk: A MARC Perspective which has become a key reference for sukuk investors and issuers.

Additionally, MARC’s rating offering introduced in 2010 called “Islamic Financial Institution Governance Ratings”, provides a structured assessment of the quality of institutional governance, acknowledging the significant role played by governance in an Islamic financial institution. In support of Islamic Development Bank’s (IDB) initiative to create a sustainable and dedicated Islamic credit rating institution, MARC has remained, since 2011, a committed technical partner to IDB-initiated Bahrain-based Islamic International Rating Agency.

Personally, a memorable issuance to me would be CIMB Islamic Bank’s Tier-2 Junior Sukuk Programme of up to RM2.0 billion in nominal value, which was admitted to the main market of Bursa Malaysia in December 2009 under an exempt regime. This listing was touted as a potential precursor to the development of a vibrant retail sukuk market tradeable on Bursa Malaysia, and MARC is pleased to have been a part of that milestone by assigning an initial rating of AAIS, which is one notch lower than MARC’s assigned long-term financial institution rating on CIMB Islamic of AA+.

During the recent financial crisis a lot of sovereigns as well as companies were affected, please share with us how did MARC deal with this difficult period.

We kept our communication lines open and interacted heavily with investors and regulators, elaborating on and clarifying our rating methodologies to yield greater appreciation for the value we create as a rating agency.

Aside from actively marketing our latest products, our non-rating activities like subscriptions and public training contributed to income for the year.

Razlan, you have been CEO of MARC since 2007, tell us how different MARC is now from when you started?

Our rating universe has become more diverse in terms of client/entity mix, types of securities and transactions and ratings (corporate, structured, project finance, sovereign, financial institution) since I came on board in 2007. These changes reflect the deepening and maturing of Malaysia’s debt capital markets over the years and MARC’s efforts to move with the times, adapt and innovate. As a rating agency that is committed to providing timely and reliable credit opinions, it is crucial to stay abreast of such changes by purposefully implementing capacity development efforts. Over the years, MARC has made its rating process more transparent, refined and fine-tuned its rating methodology to ensure consistency in its application and more robust outcomes. Going forward, MARC will continue to undertake these efforts; in addition, plans are afoot to launch new rating products such as corporate governance ratings, fund ratings and SME ratings.

What are the short-, medium- and long-term plans of MARC? Are there any plans to open offices outside Malaysia?

In light of the government’s move to liberalise the local credit rating industry (removal of mandatory credit ratings for tradeable bonds/sukuk from 1 Jan 2017), our priority is to continue promoting the relevance of credit ratings. At MARC, we do believe that there will still be demand for independent credit assessments post-2017, especially in times of increasing volatility in the global economy and financial markets. In addition, we will continue boosting revenue generation from non-rating activities like public training and subscriptions. We will also enhance the skill levels of our quant team to enable MARC to take on technical advisory jobs. We are also open to explore opportunities to extend our expertise abroad.