Malaysia’s national mortgage corporation Cagamas on September 12 made its debut in the international bond market as it priced a CNH1.5 billion offering, representing the first and the largest renminbi bond deal by a Malaysian issuer.

The three-year issue was priced at par with a similar coupon and re offer yield of 3.70%, or 15bp inside the initial price guidance of 3.85%. It attracted a strong order book in excess of CNH4.6 billion from 87 high quality investors, comprising largely of fund managers and banks.

While the deal represents a diversification of its funding sources, Cagamas president and CEO Chung Chee Leong says the company consistently monitors and proactively assesses the market environment to identify changes in trend and new challenges at the early stage. This allows for the implementation of pre-emptive measures to overcome problems and capitalize on opportunities. “To this end, Cagamas is evolving from being product-oriented to solution driven, which will enhance our effectiveness in response to the ever changing market requirements,” he tells The Asset.

Chung says Cagamas practices a strict match funding policy where all asset purchases are funded by bonds of a closely-matched size and duration as well as self-sufficient in terms of cash flow. This asset and liability management approach alleviates cash flow mismatches and liquidity gap, thus ensuring its ability to meet its financial obligations when due, notwithstanding the additional liquidity buffer of the company from shareholders’ funds.

Against this backdrop, any new issuance will largely depend on the purchase of loans and the underlying requirement of the originating institutions in terms of tenure, size and currency for institutions with regional operations to integrate its funding operations and achieve cost efficiency. In this particular case, Chung explains, the originating institutional requirement is CNH.

In terms of pricing, he says Cagamas clearly achieved a competitive pricing despite being an inaugural issuer, which normally attracts “new name premium” from investors.

For Cagamas, the valuation for its cost of funds is two-fold. First is the absolute result measured by the target margin that can be achieved based on the difference between its funding cost and return on assets purchased after applying the relevant risk factors. “This criteria was successfully achieved,” adds Chung.

Second is the comparative analysis which, among others, includes a spread over the relevant sovereign curves, coupon rate of preceding issues, funding cost in other markets and currency of issue. In this case, since the originating institution requires CNH as the purchase consideration, raising funds in similar currency will eliminate the need for conversion and more importantly avoid incurring the related conversion expenses, which could increase the absolute funding cost.

In accessing the CNH market, Chung notes that Cagamas was up against a heavy pipeline of supply from competing issuances especially the regular high grade CNH issuers such as ICBC Singapore, China Development Bank, the World Bank and the International Finance Corporation.

“Being a new issuer in the CNH market, we have to mitigate the new name premium and balance it by high-lighting our strong credit profile and scarcity value in the international markets,” he adds. “Also, with the influx of supply by high grade regular issuers, deciding the timing to conduct the book-building exercise required comprehensive study and analysis to ensure successful completion of the issuance.”

The CNH bond was drawn under Cagamas’ US$2.5 billion conventional multi-currency medium term note programme and issued through its wholly-owned subsidiary Cagamas Global PLC. This deal marks a significant milestone as this is the world’s first CNH bond to be issued by a mortgage corporation and the first CNH and non-ringgit denominated bond to be settled through Malaysia’s Real-time Electronic Transfer of Funds and Securities System (RENTAS), operated and managed by the Malaysian Electronic Clearing Corporation.

Commenting on the transaction, Bank Negara Malaysia governor Zeti Akhtar Aziz says the CNH bond reaffirms Malaysia’s infrastructure readiness and effectiveness to serve as a platform for the issuance and depository of foreign currency bonds in the international markets.

Bank of China, HSBC and Maybank Investment Bank acted as the joint bookrunners and lead managers for the transaction.