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CTOS Digital Bhd’s ambitions of growing into the realm of corporate credit ratings is accelerating.

This week, the consumer credit specialist said it will be making a general offer for the rest of the shares it does not own in RAM Holdings Bhd, which owns RAM Rating Services Bhd, and which in turn is the leading homegrown debt rating agency in the country.

CTOS currently owns a 19.23% stake in RAM. On Thursday, CTOS said based on preliminary feedback, it may achieve more than 51% shareholding in RAM.

The rationale for the move is clear. In a statements issued by CTOS, it says that as one of Asean’s leading financial and data solutions groups, it is well-positioned to work closely with RAM to develop new rating solutions for companies, small and medium- sized enterprises (SMEs) in particular, so that they can access broader forms of credit and grow their businesses.

“This in turn will accelerate RAM’s growth and establish it as the leading rating agency, not just in Malaysia but regionally,” CTOS said in a June 9 statement.

Although Malaysia is a leading corporate debt market, with sukuk offerings often winning records and accolades, issuers have largely remained the large corporations. This means that the debt market via bonds remains largely untapped for smaller companies or SMEs, which make up the bulk of businesses in Malaysia and South-East Asia.

Locally, banking institutions are the main source of financing for SMEs, providing more than 90% of total financing.

The reasons for this are a few. SMEs generally require smaller amounts of funds and most of the products in the market seem to be tailored for larger companies.

The other factor is credit issues.

“Bond investors want to make secure investments and hence prefer to buy the papers issued by companies with good credit ratings”, says an industry observer.

The World Bank in a September 2020 report on Malaysia’s domestic bond market notes the deal-size bias. It says that outsized portfolios of big institutional investors like the Employees Provident Fund (relative to the size of the domestic market) and the investment limits imposed by their investment mandates have ensured tepid interest in small debt issues.

“This disinterest has prompted arrangers to focus on larger issues, giving preference to those exceeding RM250mil, a striking change from the pre-Asian financial crisis average of RM100mil,” the international financial institution states.

This situation, according to the World Bank, discourages corporates with smaller working capital or capital requirements from tapping into the local bond market. The additional liquidity premium demanded by investors may also make the issuing of debt papers cost more.

“Against such a backdrop, bigger conglomerates may be the only ones that can access bond financing. But with governments now struggling to cope with economies overwhelmed by coronavirus, financing the needs of SMEs through the bond market is an even more urgent need now,” it points out.