{"id":51443,"date":"2022-01-14T09:10:50","date_gmt":"2022-01-14T01:10:50","guid":{"rendered":"https:\/\/www.imoney.my\/articles\/?p=51443"},"modified":"2022-01-14T10:14:04","modified_gmt":"2022-01-14T02:14:04","slug":"bond-sukuk-default","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/bond-sukuk-default","title":{"rendered":"How Does A Bond Or Sukuk Default Affect Your Portfolio?"},"content":{"rendered":"<p><a href=\"https:\/\/www.imoney.my\/articles\/how-to-invest-in-bonds\" target=\"_blank\" rel=\"noopener\">Bonds<\/a>, and their Shariah-compliant equivalent, <a href=\"https:\/\/www.imoney.my\/articles\/investing-in-sukuk-how-does-it-work\" target=\"_blank\" rel=\"noopener\">sukuk<\/a>, are a way for governments or companies to raise money.<\/p>\n<p>When you invest in bonds or sukuk, you\u2019re basically lending money to these institutions. In return, you\u2019ll get periodic interest or profit payments throughout the term of the bond or sukuk. When it matures (i.e. reaches the end of its term), you\u2019ll get your original investment back.<\/p>\n<p>Bonds and sukuk are low-risk investments, as they offer stability and consistent returns. But they aren\u2019t risk-free &#8211; you could lose money if your bond or sukuk defaults.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What-is-a-bond-or-sukuk-default\"><\/span>What is a bond or sukuk default?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If a company cannot generate enough income (or collect enough taxes, in the case of governments), it may have trouble repaying its debt. If it can\u2019t repay its bond or sukuk\u2019s interest or principal on time, it is said to have defaulted on its payments. When this happens, you could lose part or all of your original investment.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What-happens-when-a-bond-or-sukuk-defaults\"><\/span>What happens when a bond or sukuk defaults?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>According to the <a href=\"https:\/\/www.bixmalaysia.com\/learning-center\/articles-tutorials\/what-happens-when-your-bond-or-sukuk-has-defaulted\" target=\"_blank\" rel=\"nofollow noopener\">Bonds + Sukuk Information Exchange<\/a> (BIX), one of the following could happen when a bond or sukuk defaults:<\/p>\n<ul>\n<li><strong>Debt restructuring. <\/strong>Under debt restructuring, the borrower might negotiate for lower interest rates on the loan. This process could also involve extending the payment due dates, so that the borrower has more time to make payments. Alternatively, there could also be a debt-for-equity swap, in which the debt is cancelled, and in exchange the investors will receive shares in the company.<\/li>\n<li><strong>Winding up. <\/strong>This is when a company closes its operations, and its assets are sold off or distributed to its creditors. This process can be triggered voluntarily by a company\u2019s shareholders or forcefully through a court order.<\/li>\n<li><strong>Judicial management. <\/strong>Instead of winding up, a judicial manager is appointed for the company. The judicial manager will run the business with the aim of its survival, or to sell off its assets to pay creditors. During this period, the company is protected from creditor claims, so investors are unlikely to receive interest or principal repayments.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"How-do-you-know-if-a-bond-or-sukuk-is-likely-to-default\"><\/span>How do you know if a bond or sukuk is likely to default?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In Malaysia, there are two credit rating agencies, <a href=\"https:\/\/www.ram.com.my\/\" target=\"_blank\" rel=\"nofollow noopener\">RAM<\/a> and <a href=\"https:\/\/www.marc.com.my\/\" target=\"_blank\" rel=\"nofollow noopener\">Malaysian Rating Corporation Berhad<\/a> (MARC). These agencies assess a bond\/sukuk to assign it a credit rating, which reflects the company or government\u2019s financial strength and ability to pay back the bond\/sukuk.<\/p>\n<p>The credit ratings are represented by letter grades. For example, the highest grade of AAA indicates that the bond\/sukuk issuer is very likely to meet the repayments on time. A grade of BBB indicates moderate ability to make repayments. At the end of scale, a grade of C indicates a high likelihood of default, while D means that the issuer has already defaulted.<\/p>\n<p>These ratings are useful to assess a bond\/sukuk\u2019s risk rating before you invest. But they\u2019re also handy for keeping track of your portfolio, as these ratings update quarterly. A downgrade in rating could mean that your bond\/sukuk is at risk of default. For example, <a href=\"https:\/\/www.marconline.com.my\/press\/60538900464\" target=\"_blank\" rel=\"nofollow noopener\">MEX II Sdn Bhd has recently defaulted<\/a> on its RM1.3 billion sukuk, which has been anticipated by credit rating agencies who have <a href=\"https:\/\/www.marconline.com.my\/press\/index?Article_page=2&amp;coid=MEXIISB\" target=\"_blank\" rel=\"nofollow noopener\">downgraded its rating<\/a> several times since 2019.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How-many-bond-or-sukuk-default-cases-have-there-been-in-Malaysia\"><\/span>How many bond or sukuk default cases have there been in Malaysia?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The number of bond and sukuk defaults in the past decade has been fairly low. Bonds research platform <a href=\"https:\/\/www.bondsupermart.com\/bsm\/article-detail\/malaysia-s-bond-market-landscape-RCMS_220020\" target=\"_blank\" rel=\"nofollow noopener\">Bondsupermart<\/a> points out that Malaysia saw a surge in defaults during the Global Financial Crisis, but has seen single-digit defaults from 2010 to 2020.<\/p>\n<div id=\"attachment_51445\" style=\"width: 622px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-51445\" class=\"wp-image-51445 size-full\" src=\"https:\/\/static.imoney.my\/articles\/wp-content\/uploads\/2022\/01\/13130912\/YCzAtkAo.jpg\" alt=\"Chart of Malaysia bond defaults\" width=\"612\" height=\"523\" srcset=\"https:\/\/static.imoney.my\/articles\/wp-content\/uploads\/2022\/01\/13130912\/YCzAtkAo.jpg 612w, https:\/\/static.imoney.my\/articles\/wp-content\/uploads\/2022\/01\/13130912\/YCzAtkAo-300x256.jpg 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><p id=\"caption-attachment-51445\" class=\"wp-caption-text\"><a href=\"https:\/\/www.bondsupermart.com\/bsm\/article-detail\/malaysia-s-bond-market-landscape-RCMS_220020\" target=\"_blank\" rel=\"nofollow noopener\">Image via Bondsupermart<\/a><\/p><\/div>\n<h2><span class=\"ez-toc-section\" id=\"How-do-you-reduce-your-risk-as-an-investor\"><\/span>How do you reduce your risk as an investor?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Here\u2019s what you can do to reduce the risk of losing returns or your initial investment:<\/p>\n<ul>\n<li><strong>Invest in high quality bonds\/sukuk. <\/strong>Sticking to bonds\/sukuk with high credit ratings can reduce the risk of a default, though you\u2019ll also receive lower interest\/profit rates in return.<\/li>\n<li><strong>Invest in shorter-term bonds\/sukuk. <\/strong>The longer the maturity of a bond\/sukuk, the higher the probability that a negative event (like poor market conditions or a global pandemic ) could happen, increasing the risk of a default. Investing in bonds\/sukuk with shorter maturities means less interest\/profit returns, but you\u2019ll also lower the risk of a default.<\/li>\n<li><strong>Diversify with different bonds\/sukuk. <\/strong>You could consider holding bonds\/sukuk of different types (such as corporate or government), industries and maturities. Having several investments means you won\u2019t have to rely on one bond\/sukuk to generate returns.<\/li>\n<li><strong>Invest in bond\/sukuk unit trust funds or exchange-traded funds (ETFs). <\/strong>These products help you instantly diversify your money across many different bond or sukuk investments. They\u2019re also a lot more accessible than buying bonds\/sukuk directly. Buying bonds\/sukuk through a bank costs a minimum of RM250,000, but you\u2019d typically just need to invest an initial RM1,000 to buy bond\/sukuk unit trusts, or 100 shares if you\u2019re <a href=\"https:\/\/www.imoney.my\/articles\/invest-exchange-traded-funds\" target=\"_blank\" rel=\"noopener\">investing in ETFs<\/a> through the stock market.<\/li>\n<\/ul>\n<p>Besides that, you could diversify into other <a href=\"https:\/\/www.imoney.my\/articles\/low-risk-investments\" target=\"_blank\" rel=\"noopener\">low-risk investments<\/a>. For example, money market funds invest in short-term debts that are loaned to banks and the government. These funds carry lower risk than bonds &#8211; but they also typically generate lower returns.<\/p>\n<p>You could even make additional contributions into your <a href=\"https:\/\/www.imoney.my\/articles\/category\/retirement-planning\" target=\"_blank\" rel=\"noopener\">Employees Provident Fund (EPF)<\/a> account, which has delivered 5% to 6% annual returns in the past few years. For conventional accounts, it also guarantees a minimum annual dividend of 2.5%.<\/p>\n<p>But don\u2019t forget that reducing risk isn\u2019t the end-goal. Instead, the point is to align the risk of your portfolio with <a href=\"https:\/\/www.imoney.my\/articles\/investment-risk-principal\" target=\"_blank\" rel=\"noopener\">how much risk<\/a> you can take, which could depend on your age, when you want to retire and your financial obligations.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Bonds and sukuk are low-risk investments, but that doesn\u2019t mean risk-free. <\/p>\n","protected":false},"author":43,"featured_media":51448,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[942,943,558],"class_list":["post-51443","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment","tag-bond","tag-default","tag-sukuk"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What Does A Bond Or Sukuk Default Mean For Malaysian Investors?<\/title>\n<meta name=\"description\" content=\"As an investor, you could lose part or all of your investment. 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