RAM Ratings downgrades ratings of Idaman Capital's Super Senior Bonds, maintains negative Rating Watch; Senior, Mezzanine and Subordinated Bonds put on Negative Rating Watch

Published on 21 September 2011
RAM Ratings has downgraded the ratings of Idaman Capital Berhad’s (Idaman Capital or the Issuer) RM50 million Class A and RM430 million Class B Super Senior Fixed-Rate Bonds (collectively referred to as “the Super Senior Bonds”), from A1 to BB1. The negative Rating Watch on the Super Senior Bonds has also been maintained. Concurrently, the C3 ratings of the RM220 million Senior Fixed-Rate Bonds (Senior Bonds), RM20 million Mezzanine Fixed-Rate Bonds (Mezzanine Bonds) and RM80 million Subordinated Bonds (Sub Notes) - while reaffirmed - have been put on Rating Watch, with a negative outlook. The Super Senior, Senior, Mezzanine and Subordinated Bonds are collectively referred to as “the Bonds”.

Idaman Capital is a trust-owned, bankruptcy-remote, special-purpose vehicle (SPV), incorporated to undertake this primary collateralised-loan-obligation (CLO) transaction. The Bonds’ proceeds had been used to purchase an RM800 million loan portfolio (the Portfolio) from Alliance Investment Bank Berhad; the interest and principal payments from the Portfolio will be utilised to meet the SPV’s operating expenses as well as the coupon and principal obligations on the Bonds.

The downgrading of the Super Senior Bonds’ ratings had been prompted by the heightened default risk of the transaction, as a result of reduced credit support and available cash buffer to meet the senior costs as well as the Bond coupon payments and principal due on the Super Senior Bonds due on 10 October 2011. Having been informed of the likely deferment of one of the obligors’ principal repayment, RAM Ratings highlights that a default by any remaining obligors beyond that will result in a default on the Super Senior Bonds.

Based on the latest updates made available to RAM Ratings and our review of the Portfolio, out of the 10 surviving obligors with a total outstanding principal of RM202.12 million, one obligor is very likely to miss its RM22.5 million final loan repayment falling due in October 2011. The repayment of this obligor’s loan obligations depends on the entrance of a new shareholder and this party’s assumption of the obligor’s commitments under the CLO loan. While initially expected to have been completed before October 2011, the takeover is now only likely to materialise by the end of this year. Although the obligor has conveyed that it has obtained a refinancing offer from a bank, we remain concerned about the tight timeline.

In view of the above, RAM Ratings’ cashflow analysis excludes the repayment from this particular obligor; our assessment of the Portfolio will only consider the other 9 surviving obligors. Excluding this obligor, the RM306 million of outstanding Super Senior Bonds will be supported by RM180 million of outstanding loans and RM147 million of cash balances in the designated accounts as at 8 September 2011. Based on this available collateral against the SPV’s expenses as well as Bond coupons and principal payments due, the overcollateralisation level for the Super Senior Bonds amounts to approximately RM10 million. This buffer is viewed to be relatively thin against an average loan size of about RM20 million for the surviving obligors.

The negative Rating Watch on the Super Senior Bonds has therefore been maintained, premised on the increased risk of a default on the Super Senior Bonds due to the thin buffer available under the transaction. As 5 of the surviving obligors are currently on a negative rating outlook (with 3 classified as being credit-impaired), the transaction remains highly vulnerable to further missed payments by any of the obligors.

Meanwhile, RAM Ratings has also put the Senior, Mezzanine and Subordinated Bonds on negative Rating Watch - to reflect the imminent default on the respective debt tranches given the insufficient cashflow from the surviving Portfolio and existing cash balances to meet the principal due on these debt tranches on 10 October 2011. Recovery prospects are perceived to be slim because the ongoing debt- and/or corporate-restructuring exercises of the defaulted obligors are likely to be protracted. On a more optimistic note, however, the Issuer could recoup RM22.5 million from the completion of the previously mentioned obligor’s takeover, albeit after the due date (in October 2011) of the Bonds’ obligations.

All said, RAM Ratings is closely monitoring the transaction and will take the appropriate rating actions - if any - as and when we receive the relevant material information.

RAM Ratings' Rating Watch highlights a possible change in an issuer's existing debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.

Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the existing rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

Media contact
Lim Chern Yit
(603) 7628 1035
chernyit@ram.com.my