📒 Quick Take: Malaysia’s Pawn Jenga
Malaysia’s first pawn loan securitization is like Jenga blocks stacked on top of each other.
Malaysian pawnbroker Ta Yoong plans to use the money raised from the issuance of medium-term notes to fund more short-term loans, and the bond payments will be funded by the loan collection.
This is a turnover game premised on the stability of gold prices. The structure bears a resemblance to the CDOs that fuelled the US housing bubble before it burst in 2008.
Malaysia’s first pawn loan securitization reminds me of Jenga blocks that are stacked on top of each other.
I wrote yesterday that Malaysian pawnbroker Ta Yoong has repackaged its gold-backed loans as bonds to raise cash from investors. While this represents a milestone in Malaysia’s financial innovations, there’s an important caveat: Everything’s fine when gold prices stay high, but the risk is it can unravel quickly if there’s a substantial drop below the value of the loans.
Malaysian rating agency RAM Ratings assigned a preliminary AAA rating to the RM 200 million (USD 47.5 million) senior bonds issued by TY Consolidated Capital Berhad, a special purpose vehicle set up to facilitate the securitisation. This is the highest rating that signifies “a superior capacity to meet its financial obligations,” according to RAM’s website.
After reading the press release, I had more questions:
“Founded in 1947, Ta Yoong is a second-generation family business with over 70 years of experience in the pawnbroking industry. The Group is in the process of institutionalising its business with professionals for long term continuity.”
Eveline: If Ta Yoong – which does not appear to have an official website – is in the process of professionalizing its business, who signed off on this complex structured product?
“Currently owning and operating 15 pawnshops in Klang Valley, it has consistently demonstrated healthy disbursements and earnings despite intense competition from both conventional and Ar-Rahnu pawnbroking operators. In FY Dec 2024, the Group disbursed about 410,000 pawn loans amounting to RM854 mil.”
“Given the short-tail of pawn loans, which have maximum regulated tenures of six months, the transaction structure includes a revolving feature that allows the Issuer to use net monthly collections to buy additional receivables from the Originators, provided that eligible criteria and conditions are met. The revolving period (RP) will run for 48 months from the issue date before entering a controlled amortisation period of 12 months where the Issuer will cease further purchases and cash collections will be used to meet ongoing obligations and redeem outstanding MTN on the maturity date. The Issuer must maintain a minimum OC level of 15.50% throughout the RP and if any Junior MTN coupons are paid.”
Eveline: Ta Yoong is basically planning to use the money raised from the issuance of medium-term notes (MTN) to fund more short-term loans, and the bond payments will be funded by the loan collection.
The average size of Ta Yoong’s pawn loans last year was RM 2,083 (USD 495), while the RM 200 million senior MTN – alongside the RM 31 million junior MTN subscribed by the group – will only involve gold-backed loans from nine out of its 15 pawnshops.
In short, this is a turnover game premised on the stability of gold prices. The structure bears a similarity to the collateralized debt obligations (CDOs) that fuelled the US housing bubble before it burst in 2008.
However, a friend who’s familiar with these CDOs pointed out that a key difference is the degree of correlation between the loans and the underlying portfolio.
When the US subprime mortgage crisis unfolded, the correlation spiked as many Americans could not service the rising interest rates and defaulted on their mortgages.
But in the case of gold-backed pawn loans, the correlation should be higher because any volatility in gold prices will affect all loans, this friend said, noting that a borrower may choose to walk away if the value of the pawned gold falls below the loan amount.
Apart from gold prices, other risks include the collateral assessment and the financial health of the bond servicer. Do the buyers of these bonds understand the risks that come with their investment? This is the most important question that should be asked regardless of the top-notch credit rating.