MALAYSIAN RATING CORPORATION BERHAD

1st INTERNATIONAL LABUAN ISLAMIC FINANCE CONFERENCE The Evolution of the Global Islamic Capital Market Environment
By : Zaiton Mohd Hassan, Hassan, FCCA President/Executive Director

Malaysian Rating Corporation Berhad

July 7, 2004

An Introduction to MARC
MARC is a credit rating institution. We undertake the ratings of : Private Debt Securities Financial Institutions Corporates Islamic Capital Market Instruments MARC commenced operations on 17 June 1996. MARC has a paid-up capital of RM10 million, and its shareholders are : Insurance Companies (16) Stockbroking Firms (11) Discount Houses (6)

2004 Malaysian Rating Corporation Berhad

Rating Status as at 30 June 2004

Completed Ratings Published Rating Analytical Group
1

248 112
186
18 2 4 3 2 3 8 6 1 1

Total Rated Value Total Issue Value

RM 84,617.3 million (217 issues) RM 45,468.2 million (109 issues)

CORPORATE DEBT
CONSTRUCTION CONSUMER PRODUCTS Automotive Food Products Textiles & Garments Others FINANCE Financial Institution Financial Holding Companies Others GOVERNMENT HOTELS
1

INDUSTRIAL PRODUCTS Automotive Building Materials Pulp & Paper Transportation Others INFRASTRUCTURE & UTILITIES Oil & Gas Power Port/Airport Water PLANTATION Primary CLO Hire Purchase Receivables Property Construction Technology

4 18 2 3 6 3 7 2 2 11 5 2 1 1 1

PROPERTY TECHNOLOGY TRADING/SERVICES Healthcare Media & Entertainment Telecommunication Transportation Travel/Tourism Conglomerates Retail Oil & Gas Others

52 2 2 4 1 6 1 4 1 5 2

PROJECT FINANCE
INFRASTRUCTURE & UTILITIES Gas District Cooling Oil & Gas Power Toll Roads Water TRADING SERVICES Technology Transportation INFRASTRUCTURE & UTILITIES Oil & Gas Power FINANCE Others PROPERTY TRADING SERVICES Conglomerate

21
2 1 2 9 4 1 2

ASSETASSET-BACKED SECURITIES 10

FINANCIAL STRENGTH
FINANCIAL INSTITUTION INSURANCE COMPANIES

18
10 8

ISSUER

6
1 1 1 2 1

CORPORATE CREDIT
CONSTRUCTION FINANCE Others INFRASTRUCTURE & UTILITIES Oil & Gas Port/Airport TRADING/SERVICES Telecommunications

7
1 1 1 1 1
2004 Malaysian Rating Corporation Berhad

Oil & Gas Water

1 1

MARC -

PROFILE OF PDS RATINGS COMPLETED AS AT 30 JUNE 2004

No. of Issues Conventional Islamic AL-BAI BITHAMAN AJIL (ABBA) MURABAHAH BAI AL-DAYN IJARAH - SUKUK ISTISNA 98 119 59 52 3 3 2

Rated Value (Billion) 35.8 48.9 26.6 15.5 2.9 3.2 0.7

45 55

42 58 55 31 6 7 1

2004 Malaysian Rating Corporation Berhad

Development work in Islamic Capital Market

First Rating Agency to introduce specific set of rating symbols and definitions for Islamic capital market instruments.

2004 Malaysian Rating Corporation Berhad

CORPORATE DEBT ISSUE RATINGS

RATING SYMBOLS & DEFINITIONS
LONG-TERM RATINGS LONG LONG-TERM RATINGS
MARCs Long-Term Ratings are assigned to debt issues with maturities of more than one year. These debt ratings specifically assess the likelihood of timely repayment of principal and payment of interest over the term to maturity of such debts.

Investment Grade

AAA AA A BBB

Indicates that the ability to repay principal and pay interest on a timely basis is extremely high. Indicates a very strong ability to repay principal and pay interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Indicates the ability to repay principal and pay interest is strong. These issues could be more vulnerable to adverse developments, both internal and external, than obligations with higher ratings. The lowest investment grade category; indicates an adequate capacity to repay principal and pay interest. More vulnerable to adverse developments, both internal and external, than obligations with higher ratings.

Non-Investment Grade

BB B C D
NOTE :

While not investment grade, this rating suggests that likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Indicates a higher degree of uncertainty, and therefore, greater likelihood of default. Adverse developments could negatively affect repayment of principal and payment of interest on a timely basis. High likelihood of default, with little capacity to address further adverse changes in financial circumstances. Payment in default. Long-Term Ratings from AA to B may be modified by the addition of a plus (+) or minus (-) suffix to show relative standing within the major rating categories. Bank-guaranteed issues will carry a suffix (bg), corporate-guaranteed a (cg) and all other supports an (s) when such guarantees or supports give favourable effect to the assigned rating.

2004 Malaysian Rating Corporation Berhad

Development work in Islamic Capital Market

Three Rating Products for Islamic capital market to date ISLAMIC DEBT ( ID ) ( IS )

ISLAMIC SUKUK (ASSET BASED INSTRUMENTS) ISLAMIC INVESTMENT QUALITY RATING ( IQ )

2004 Malaysian Rating Corporation Berhad

ISLAMIC CAPITAL MARKET INSTRUMENT RATINGS

RATING SYMBOLS & DEFINITIONS
LONG-TERM RATINGS LONG LONG-TERM RATINGS
MARCs Long-Term Ratings are assigned to Islamic capital market instruments with maturities of more than one year. These ratings specifically assess the likelihood of timely payment of the instrument issued under the various Islamic financing contract(s).

Investment Grade

AAA ID AA ID A ID BBB ID

Extremely strong ability to make payment on the instrument issued under the Islamic financing contract(s). Very strong ability to make payment on the instrument issued under the Islamic financing contract(s). Risk is slight with degree of certainty for timely payment marginally lower than for instruments accorded the highest rating. Strong ability to make payment on the instrument issued under the Islamic financing contract(s). However, risks are greater in periods of business and economic stress than for instruments with higher ratings. Adequate ability to make payment on the instrument issued under the Islamic financing contract(s). Vulnerable to moderately adverse developments, both internal and external.

Non-Investment Grade

BB ID B ID C ID D ID
NOTE :

Uncertainties exist that could affect the ability of the issuer to make payment on the instrument issued under the Islamic financing contract(s). Significant uncertainty exists as to timely payment on the instrument issued under the Islamic financing contract(s). Slight adverse developments could impair issuers ability to fulfill such obligation. Possesses a substantial risk of default, with little capacity to address further negative changes in financial circumstances. Failed to make scheduled payment on the instrument issued under the Islamic financing contract(s). Long-Term Ratings from AA to B may be modified by the addition of a plus (+) or minus (-) suffix to show relative standing within the major rating categories. Bank-guaranteed issues will carry a suffix (bg), corporate-guaranteed a suffix (cg) and for all other supports a suffix (s) when such guarantees or supports give favourable effect to the assigned rating.

2004 Malaysian Rating Corporation Berhad

ISLAMIC CAPITAL MARKET INSTRUMENT RATINGS

RATING SYMBOLS & DEFINITIONS
SHORT-TERM RATINGS SHORT SHORT-TERM RATINGS
MARCs Short-Term Ratings are assigned to Islamic capital market instruments with original maturities of one year or less, and are intended to assess the likelihood of timely payment of the instrument issued under the various Islamic financing contract(s).

Investment Grade

MARC MARC1 ID Extremely strong capacity to make timely payment on the instrument issued under the Islamic financing contract(s). MARC MARC2 ID Strong capacity to make timely payment on the instrument issued under the Islamic financing contract(s). Timeliness of payment is MARCMARC-3 ID
slightly susceptible to adverse changes in operating circumstances and economic conditions. Adequate capacity to make timely payment on the instrument issued under the Islamic financing contract(s). Moderately adverse changes in operating environment and economic conditions may weaken financial capacity to fulfil such obligation.

Non-Investment Grade

MARCMARC-4 ID D ID
NOTE :

Vulnerable to non-payment of instrument issued under the Islamic financing contract(s). Capacity to make payment on the instrument is dependent upon favourable business, financial and economic conditions. Failed to make scheduled payment on the instrument issued under the Islamic financing contract(s).

Short-Term Ratings will also carry a suffix (bg) for bank-guaranteed issues, (cg) for corporate-guaranteed issues and an (s) for all other supports when such guarantees or supports give favourable effect to the assigned rating

Subscript ID for LongLong-Term and ShortShort-Term Ratings denotes an Islamic Private Debt Security. Security.

2004 Malaysian Rating Corporation Berhad

ISLAMIC CAPITAL MARKET INSTRUMENT RATINGS

( -BASED INSTRUMENTS) ( ISLAMIC ISLAMIC SUKUK SUKUK (ASSET (ASSET-BASED INSTRUMENTS)
LONG-TERM RATINGS LONG LONG-TERM RATINGS
MARCs Long-Term Ratings are assigned to Islamic capital market instruments with maturities of more than one year. These ratings specifically assess the likelihood of timely payment of the instrument issued under the various Islamic asset-based financing contract(s). Investment Grade

AAAis AAis Ais BBBis

Extremely strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). Very strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). Risk is slight with degree of certainty for timely payment marginally lower than for instruments accorded the highest rating. Strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). However, risks are greater in periods of business and economic stress than for instruments with higher ratings. Adequate ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). Vulnerable to moderately adverse developments, both internal and external.

Non-Investment Grade

BBis Bis Cis Dis NOTE :

Uncertainties exist that could affect the ability to make timely payment on the instrument issued under the Islamic asset-based financing contract(s). Significant uncertainty exists as to timely payment on the instrument issued under the Islamic asset-based financing contract(s). Slight adverse developments could impair ability to make timely payment. Possesses a substantial risk of default, with little capacity to address further negative changes in financial circumstances. Failed to make scheduled payment on the instrument issued under the Islamic asset-based financing contract(s).
Long-Term Ratings from AA to B may be modified by the addition of a plus (+) or minus (-) suffix to show relative standing within the major rating categories. Bank-guaranteed issues will carry a suffix (bg), corporate-guaranteed a suffix (cg) and for all other supports a suffix (s) when such guarantees or supports give favourable effect to the assigned rating.

2004 Malaysian Rating Corporation Berhad

ISLAMIC CAPITAL MARKET INSTRUMENT RATINGS

RATING RATING SCALE SCALE
MARCs Islamic Investment Quality Ratings are assigned to Islamic capital market instruments with maturities of more than one year. These ratings assess the general investment quality of the instrument issued under the various Islamic equity financing contract(s) and are not intended to address the probability of timely payment. Investment Grade AAAiq AAiq Aiq BBBiq Instruments rated AAA are judged to be of the best investment quality. Probability of expected returns and maintenance of contractual terms over a long period of time is excellent. Instruments rated AA are judged to be of high investment quality. Probability of expected returns and maintenance of contractual terms over a long period of time is high. Instruments rated A are judged to be of upper-medium grade investment quality. Probability of expected returns and maintenance of contractual terms over a long period of time is good. Instruments rated BBB are judged to be medium grade investment quality. Probability of expected returns and maintenance of contractual terms over a long period of time is moderate.

Investment Grade BBiq Instruments rated BB are judged to be of low investment quality. Probability of expected returns and maintenance of contractual terms over a long period of time may be limited. Biq Ciq Diq NOTE : Instruments rated B are judged to be of poor investment quality. Probability of expected returns and maintenance of contractual terms over a long period of time may be questionable. Instruments rated C are judged to be of lowest investment quality. The likelihood that the default covenants under the equity financing documents will be breached is high. One or more of the default covenants under the equity financing documents have been breached. Long-Term Ratings from AA to B may be modified by the addition of a plus (+) or minus (-) suffix to show relative standing within the major rating categories. A suffix (s) is applied when external guarantees or supports give favourable effect to the assigned rating. Subscript iq denotes an Islamic Investment Quality rating.

2004 Malaysian Rating Corporation Berhad

One of the very few rating agencies having a Shariah Advisory Panel

Y.BHG. DATO MD. HASHIM BIN HAJI YAHYA Y.BHG.DATO MOHD MOKHTAR SHAFII PROF.MADYA DR. MOHD DAUD BAKAR

2004 Malaysian Rating Corporation Berhad

RISK & MEASUREMENT IN ISLAMIC CAPITAL MARKET

2004 Malaysian Rating Corporation Berhad

When evaluating a financial proposal, there are some basic and common risk areas we examine regardless whether it is a conventional or Islamic instrument

2004 Malaysian Rating Corporation Berhad

ANALYTICAL FRAMEWORK
Comparisons

BUSINESS RISK
Issue Structure Company Company Structure Structure Operating/Financial Operating/Financial Position Position Management Management Quality Quality Industry/Regulatory Industry/Regulatory Trend Trend Sovereign/Macro-Economic Sovereign/Macro-Economic Analysis Analysis

Industry Characteristics Competitive Position

(e.g. Marketing, Technology, Efficiency)

ISSUE ISSUE STRUCTURE STRUCTURE

Management

FINANCIAL RISK BUSINESS BUSINESS RISK RISK ANALYSIS ANALYSIS

Industry Industry Outlook Outlook Competitive Competitive Position Position

FINANCIAL FINANCIAL RISK RISK ANALYSIS ANALYSIS

Financial Financial Policies Policies Capital Capital Structure Structure Profitability Profitability Cash Cash Flow Flow Coverage Coverage Financial Financial Flexibility Flexibility

Financial Characteristics Financial Policy Profitability Capital Structure Cash Flow Protection Financial Flexibility

Moodys Rating Analysis

Industrial Company

Standard & Poors Rating Analysis

Industrial Credit Analysis Factors

MANAGEMENT MANAGEMENT EVALUATON EVALUATON

MARCs Rating Analysis

Corporates
2004 Malaysian Rating Corporation Berhad

ANALYTICAL FRAMEWORK PROJECT FINANCE

ISSUE STRUCTURE PRINCIPAL PROJECT AGREEMENTS - Concession Agreement - Offtake Contract - Construction/Engineering & Procurement (EPC) Contract - Fuel Supply Contract - Operation & Maintenance - Shareholders Agreement CONSTRUCTION / COMPLETION RISKS - Delays - Cost Overruns - Site Availability - Risk Mitigation e.g. LAD, Performance Guarantees PERFORMANCE / OPERATING RISKS REGULATORY RISKS PROJECTED FINANCIAL RESULTS PROJECT SPONSORS

2004 Malaysian Rating Corporation Berhad

Management/Fiduciary Risk

Beyond management skills, track record and expertise goes into concept of trustworthiness

2004 Malaysian Rating Corporation Berhad

Particularly in Mudharaba and Musyaraka contracts where return to investor is entirely dependent on project performance.

2004 Malaysian Rating Corporation Berhad

Risk Management

Financial vs. Performance Covenants Events of Default

2004 Malaysian Rating Corporation Berhad

IQ rating symbols and definitions

Examples of performance covenants Maintaining special purpose nature to complete the project. Submission of financial information on a timely basis disclosure / transparency

2004 Malaysian Rating Corporation Berhad

Four Overarching Principles of Corporate Governance Practices

1) Fairness 2) Transparency / disclosure a. quality of information b. Timeliness c. Financial and operational disclosure d. Accounting policies 3) Accountability 4) Responsibility

2004 Malaysian Rating Corporation Berhad

MALAYSIAN RATING CORPORATION BERHAD

THANK YOU

By : Zaiton Mohd Hassan, Hassan, FCCA President/Executive Director

Malaysian Rating Corporation Berhad

July 7, 2004