Cagamas Berhad National Mortgage Corporation of Malaysia

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ASIFMA Structured Finance Conference 2016 Pre-Conference Workshop (28 September 2016)

Islamic Finance and Shariah-Compliant Securitisation

Strictly Private & Confidential

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Content

About Securitisation

Islamic Finance & Securitisation

Islamic Securitisation in Malaysia

Cagamas’ Islamic Securitisation Experience

Cagamas Background

Awards & Accolades

About Securitisation

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Definition:

Cost-efficient and flexible structured finance technique of liquidity transformation and risk transfer, which converts present or future asset claims of varying maturity and quality into tradable debt securities.

An arrangement which involves the transfer of assets or risks to a third party where such transfer is funded by the issuance of debt securities (conventional or Islamic securities) to investors.

Payments to investors in respect of such debt securities or Islamic securities are principally derived, directly or indirectly, from the cash flows of the assets.

THEREFORE, securitisation of assets need not be funded only by asset-backed securities as long as a transfer of assets is achieved.

* Guidelines of the Offering of Asset-Backed Securities issued by the Securities Commission of Malaysia (July

2004)

Securitisation: Recap

Islamic Finance & Securitisation

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Securitisation In Islamic Finance

Basic Concept

Islamic securitisation transforms bilateral risk sharing between customers and financiers into the market-based refinancing of one or more underlying Islamic finance transactions.

Originators would sell revenues (existing/future) from a portfolio of Shariah-compliant assets to an Issuer who issues unsecured securities (e.g. Sukuk) to market investors (Sukukholders).

The Sukukholders assume the role of a collective financier whose investment does not involve guaranteed, interest-based earnings.

Islamic securitisation would need to involve the conversion of uncertain, business related proceeds of direct investment in Shariah-recognised real economic activity.

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Securitisation In Islamic Finance

General Guiding Principles

Riba (usury) Gharar (uncertainty) Maysir (gambling)

Payment for usage of assets is acceptable to Shariah

≈ Conventional securitisation’s risk-return profile

? i. the type of assets in the underlying portfolio; ii. the generation of investment returns, and iii. the transaction structure (including credit enhancement as well as credit

and liquidity support)

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Islamic Liquidity Instruments

Commodity Murabahah Transactions

Cagamas, being the largest issuer of

corporate Sukuk in Malaysia, will

continue to play an active role in

advancing the presence and the

diversity of Islamic finance by introducing

new and innovative Islamic products in

the financial market

Common sources of liquidity for Islamic Financial Institutions…

Islamic Debt Securities e.g. Sukuk

Interbank

Murabahah

Shariah-

compliant Equities/ Mutual Funds

Islamic

Placement Accounts

e.g. Islamic Repos

Islamic Liquidity

Instruments

Islamic Securitisation in Malaysia

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Background of Islamic Securitisation in Malaysia

1. Cagamas issued RM3.8 billion Sukuk Murabahah 2. Malaysia Building Society Berhad issuance of 1st Tranche of RM495

million AA1 Covered Sukuk.

1986

2001

2004

2005

Securitisation as a financing technique first used in Malaysia

SC introduced ABS Guidelines

SC revised ABS Guidelines, included Islamic ABS

Cagamas RMBS issued RM2.05 billion AAA Islamic ABS (Sukuk Musyarakah)

2013

2008 Telekom Malaysia Berhad issued RM1 billion ABS Sukuk

2007 Cagamas RMBS issued RM2.1 billion AAA Islamic ABS (Sukuk Musyarakah)

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Rules and Regulations for Securitisation in Malaysia

1. Prudential Standards On Securitisation Transactions

outlined the role and responsibilities of the board of directors and the senior management of banking institutions involved in securitisation activities

specify best practices with respect to the general risk management framework in relation to securitisation activities

1. Guidelines on the Offering of Asset-Backed Securities (2004) for the issuance of ABS, the

Issuer must seek the approval of the SC by complying with the ABS Guidelines as well as the Guidelines on Private Debt Securities (PDS Guidelines) or the Guidelines on Sukuk (Sukuk Guidelines), where applicable

2. Guideline on Trust Deeds

(2011) all issuances will require the

Issuer to execute a trust deed unless the issuances are exempted under Schedule 8 of the Capital Markets and Services Act 2007

Cagamas’ Islamic Securitisation Experience

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Cagamas’ Islamic Securitisation Deals Highlights

Deal Highlight 1 Deal Highlight 2

Issuer Cagamas MBS Berhad* •wholly owned by Cagamas Holdings Berhad • Single purpose entity incorporated tor the securitisation purposes •SPV with bankcruptcy remote features •no petition clause for winding up by parties that CMBS contracted with

Cagamas Berhad

Issuance Amount RM2.05 billion RM3.8 billion

Issuance Date 8 August 2005 16 October 2013

Instrument Sukuk Musyarakah RMBS Sukuk Murabahah

Rating AAA (MARC & RAM) AAA (MARC & RAM)

Originator & Servicer Housing Loans Division of Ministry of Finance Malaysia (BPP)

Housing Loans Division of Ministry of Finance Malaysia (BPP)

Administrator and Transaction Administrator

Cagamas Berhad

Securitised Asset Government’s staff Islamic house financings

Government’s staff Islamic house financings

Profit Distribution Frequency

Quarterly Semi-annually

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Key Features

Typical retail mortgages

Matured scheme and operations

Government Staff Islamic Home Financings

Key Features

Subsidised product

Predefined comprehensive origination standard

Predefined strict mortgage quantum

Non-discretionary servicing

Typical Islamic retail house financings

Matured operations (since 1971)

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Eligibility Criteria

Eligibility Criteria

Salaried GOM employee or pensioned GOM employee

Payment via salary or pension deductions

Salary/Pension Monthly Instalment

Mortgage Reducing Term Takaful (MRTT) Outstanding principal amount

Fully disbursed and no remaining GOM obligations in respect of the financing

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Sukuk Musyarakah RMBS Structure

GOM – Government of Malaysia

Transaction Background (1) GOM as originator sells a pool of Government staff Islamic home financing

(GSIHF) to Cagamas MBS Berhad (CMBS)

(2) CMBS issues Sukuk Musyarakah RMBS to onshore and offshore investors

(3) CMBS receives Sukuk Musyarakah RMBS issuance proceeds

(4) CMBS pays purchase consideration for the GSIHF to GOM

Cagamas MBS GOM Investors

(1) Sale of

GSIHFs

(4) Purchase

consideration

Prepares transaction and servicer

reports and performs administrative

duties

(3) Proceeds from

Sukuk Musyarakah RMBS

Remits mortgage/

pension payments

Excess proceeds from Sukuk

Musyarakah RMBS issue

Cagamas

Collections Account

(2) Issues Sukuk

Musyarakah RMBS

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Sukuk Murabahah Structure

Vendor A

(2) Issues Sukuk

Murabahah

(3) Proceeds

(1)

Purchases

Commodity

on Spot

(4)

Purchase

Price

Vendor B

Sukuk

Trustee

Cagamas Issuer/ Agent

Sukuk Investors

(9)

Periodic

Profit

Payments

(6) Sells

Commodity

on Spot

(7)

Selling

Price

Transaction Description 1) Cagamas, as Agent (Wakeel) of Sukuk investors, purchases commodity on a spot basis

from Vendor A at Purchase Price

2) Cagamas (“Issuer”) issues Sukuk to investors to evidence their ownership of the

commodity

3)&4) Proceeds received from the Sukuk investors are used or deemed to have been used to

pay the purchase price of the commodity

5) Sukuk Trustee, on behalf of the Sukuk investors, sells the commodity to Cagamas at

Sale Price repayable on a deferred payment basis

6) Cagamas sells the commodity to Vendor B on a spot basis at Selling Price

7) Proceeds received from the sale of commodity are used to fund Cagamas’ Islamic

operations

8)&9) Cagamas makes periodic profit distribution (e.g. semi annual basis) to the Sukuk Trustee

on account of its obligation to pay the Deferred Sale Price. Upon maturity of the

transaction, Cagamas will pay the Sukuk Trustee the principal to redeem the Sukuk

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Issues and Challenges

Issues Details

Historical Data Lack of historical data for valuation of the securitised pool Challenges in obtaining historical data from BPP

System Requirements

Originator to develop sub-system to tag financings sold to Cagamas Originator’s system ability to generate the appropriate reports

Accounting A true sale or not a true sale If yes, can be derecognised i.e. passing over of risk, reward and

control to issuer

Legal Amendment of the Housing Loans Fund Act 1971 Confidentiality issues relating to Government data Policy changes on staff housing loans/financings

Taxation Corporate and service tax Stamp duty

Regulatory Securities Commission: Certain exemptions and waivers from Guidelines on ABS

BNM: Regulatory treatment of the RMBS for the purpose of facilitating investments and investor requirements

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Cagamas Background

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Background

Entity Name Cagamas Berhad

Shareholders Cagamas Holdings Berhad (100%)

Credit Rating A3 Stable (Moody’s)

Date of Incorporation

2 December 1986

Objectives

Established by Bank Negara Malaysia to support the national agenda of increasing home ownership and promoting the development of Malaysia’s capital markets

Development and promotion of Islamic finance within Malaysia

Business Model

Through the issuance of conventional and Islamic securities, Cagamas funds the purchase of housing loans and house financings through its Purchase With Recourse (PWR) and Purchase Without Recourse (PWOR) schemes

By doing this, Cagamas is able to provide liquidity to financial institutions at a competitive cost, encouraging them to provide additional housing loans and house financings to new applicants at an affordable price

The PWR and PWOR schemes have now been expanded to include other loans and financings such as hire purchase / leasing receivables and personal loans and financings

Cagamas at a Glance

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Cagamas Holdings Berhad

Cagamas Berhad is a wholly owned subsidiary of Cagamas Holdings Berhad and remains the core revenue and profit generator for Cagamas Group

Cagamas MBS Berhad

100%

• Purchases mortgage assets and Islamic mortgage assets from the Government of Malaysia (“GoM”)

• Issuance of RMBS and IRMBS to finance the purchases

Cagamas SRP Berhad

100%

• Mortgage guarantee in relation to Skim Rumah Pertamaku or “My First Home Scheme” and Skim Perumahan Belia or “Youth Housing Scheme”

Cagamas MGP Berhad

• Mortgage guarantee and mortgage indemnity business and other form of credit protection

Cagamas Berhad Cagamas SME Berhad BNM Sukuk Berhad

100%

• Main operating company

Cagamas Global P.L.C. Cagamas Global

Sukuk Berhad

• Incorporated in Labuan, Malaysia

• Facilitate the issuance of Conventional Multi-currency debt securities

• Facilitate the issuance of Islamic Multi-currency debt securities

100%

100%

• Undertake the issuance of Sukuk on behalf of BNM

100%

• Securitisation of small and medium enterprise credit facilities via cash or synthetic securitisations or a combination of both

• The synthetic securitisation transaction was completed in October 2012

100%

Note: Shareholding structure as at May 2016

• Cagamas MGP Berhad’s business was undertaken by Cagamas SRP Berhad effective 1 January 2014

100%

Structure of the Cagamas Group of Companies

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Business Model

Liquidity Model

CAGAMAS

Investors

CAGAMAS MBS

Sells ABS

Securitisation Model

Sells Cagamas Bonds/Sukuk

$

Bond/Sukuk proceeds

Purchase assets

without recourse

$

Sales proceeds

Purchase assets with

recourse

$

Sales proceeds

Stru

ctu

re

Pro

du

ct

Purchase with Recourse Programme (PWR)

Composition of total assets: 51%

Net income FY2015: 14%

Purchase without Recourse Programme (PWOR)/ Securitisation

Composition of total assets: 49%

Net income FY2015: 86%

Co

nd

uit

fo

r Liquidity Management

Hedging

Capital Management

Risk Management

Portfolio Management

Asset Warehousing

Cagamas Berhad

Cagamas purchases loans/financings under 2 schemes – Purchase with Recourse and Purchase without Recourse

Investors

Mortgage Originators

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Promotion of home ownership/home accessibility and affordability

Link the mortgage market to the capital market

Provide access to competitively priced and longer term funds of up to 20 years

Promote the origination of longer tenure house financing

Enhance and support in the stabilization of the financial sector

Provide credit and portfolio risk management, and capital management solutions

Conduit to remove systemic risk in the financial sector

Development of the Malaysian Capital Market

Significant player in the debt securities market - 2nd largest issuer of debt securities after the Government of Malaysia

- Approx. 23% of Outstanding AAA PDS market

- Approx. 74% of Outstanding AAA ABS market

Development of the Islamic financial sector

Significant player in the sukuk market - Approx. 14.4% of Outstanding AAA Sukuk market (RM13.4 billion)

- Approx. 75% of Outstanding AAA Islamic ABS market (RM2.1 billion)

Support the promotion of Malaysia International Islamic Financial Centre (MIFC)

Role and Impact of Cagamas

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Cagamas Sukuk Issuances 1994 - 2015

Cagamas had helped spur the development of the Sukuk market since 1994 by: 1. Creating and establishing pricing benchmark

for the Private Debt Securities (PDS) market; and

2. Leading the way in terms of innovation such as the use of Crude Palm Oil (CPO) as an acceptable underlying asset to facilitate sukuk issuance

From Cagamas’ perspective as an issuer, the type of sukuk for issuance purposes would depend on, amongst others, the demand of the investors as Cagamas’ commitment to fulfil its mandates is achieved by matching issuances with assets that it purchases.

Cagamas’ pioneering efforts in the Sukuk space provided comfort and confidence to other issuers and encourage them to undertake further development in their sukuk offerings.

Cagamas, in meeting its commitment to develop the Islamic capital market in Malaysia, is continuously innovating and introducing sukuk structures that would be acceptable to the most discerning investors especially with the introduction of its first USD2.5 billion Islamic Multicurrency MTN (Islamic EMTN) programme in 2014.

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Awards & Accolades

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Awards & Accolades

Recent Awards and Accolades

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Awards & Accolades

Recent Awards and Accolades

Conferment of ‘Emas’ Status for Cagamas Singapore Dollar denominated Sukuk EMTN issuance by Bank Negara Malaysia

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This presentation was prepared exclusively for the benefit and internal use of the recipient. This presentation does not carry any right of publication or disclosure to any other party. Neither this presentation nor its content may be used for any other purpose without prior written consent of Cagamas Berhad (“Cagamas”). The information in this presentation reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of any information available from public sources. Except as required by law, Cagamas and their officers, employees, agents and advisers do not accept any responsibility for or liability whatsoever in respect of any loss, liability, claim, damage, cost or expense arising as a consequence (whether directly or indirectly) of reliance upon any information or any statement or opinion contained in this document, nor do they make any representation or warranty (whether expressed or implied) as to the accuracy or completeness of this documents or its contents. This presentation is not an offer documents and cannot give rise to any contract.

Disclaimer

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Cagamas Berhad Level 32, The Gardens North Tower

Mid Valley City, Lingkaran Syed Putra

59200 Kuala Lumpur

Malaysia

Tel: +603 - 2262 1800

Fax: +603 - 2282 8125 / +603 - 2282 9125

www.cagamas.com.my

Image: Simon Howden / FreeDigitalPhotos.net

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