MARC has affirmed its ratings of A+, A and BBB+ on the outstanding Class A, B and C notes issued by RCE Advance Sdn Bhd (RCEA) under its RM420 million Fixed Rate Medium Term Notes (MTN) Programme

MARC has affirmed its ratings of A+, A and BBB+ on the outstanding Class A, B and C notes issued by RCE Advance Sdn Bhd (RCEA) under its RM420 million Fixed Rate Medium Term Notes (MTN) Programme. The ratings affect RM75 million of outstanding notes under Class A, RM80 million under Class B and RM60 million under Class C. The outlook on the ratings is stable. RCEA is a special purpose financing vehicle of RCE Marketing Sdn Bhd (RCEM) and issuer of collateralised notes.

The affirmed ratings continue to reflect continued compliance with the minimum required three-month coverage ratio of 1.66 times on the collateral backing the notes, which consists of a RM177.5 million pool of cooperative loans extended to civil servants and serviced through automatic monthly salary deductions by Angkatan Koperasi Kebangsaan Malaysia Berhad (ANGKASA), and RM57.9 million of funds in the designated accounts as at September 30, 2012. Protection against default risk of the loans is provided by an undertaking by parent RCEM to replace defaulted identified eligible receivables (IER). The notes are also backed by an irrevocable corporate guarantee from ultimate parent RCE Capital Berhad (RCE Capital) which relies on RCEM for over 90% of its consolidated revenue and net profits.

Reflecting RCEM's continued role as servicer of the loan pool and its undertaking to substitute defaulted and prepaid IER and/or provide funds to maintain a three-month collateral coverage ratio of 1.66 times, the Class A and Class B notes are rated two and one notches above the standalone corporate credit rating of RCEM respectively. The rating of the Class C notes is one notch below RCEM's rating to reflect its subordination to the senior notes in respect of coupon payment and principal repayment.

RCEM's ability to originate new IER had been affected by a seven-month standstill in loan origination at its main business partner Koperasi Wawasan Pekerja-pekerja Berhad (KOWAJA) and increased restrictions within the consumer cooperative sector. While KOWAJA has resumed loan disbursements since July 2011, MARC believes the muted outlook for household credit growth and increased regulation of the consumer cooperative sector will weigh on RCEM's loan and funding growth. Notwithstanding RCEM's lower loan growth, MARC's assessment has shown that the company has a sufficient pool of potential IER and/or funds to maintain the required three-month 1.66 times collateral coverage ratio over the next 12 to 18 months. According to management, RCEM currently has a RM103 million pool of unpledged IER available for substitution compared to the average monthly new IER substituted into the collateral pool of RM2.8 million during the period under review (October 2011 to September 2012).

Since MARC's last review, the credit quality of the loan pool has remained sound. The average monthly default rates of the collateral pools have improved to between 0.2% and 0.3% based on a nine-month overdue basis compared with last year's review of between 0.3% and 0.5%. Average monthly prepayments were also lower at between 0.4% and 1.3% (2011 review: 2.6% to 4.0%). As at September 30, 2012, defaulted loans comprise 22 accounts amounting to RM0.37 million, or 0.2% of the opening pool balance, well below MARC's expected default rate. At the end of the period under review, the collateral portfolio was comprised of 7,581 seasoned accounts with an average remaining term to maturity of 65.8 months.

For the financial year ended March 31, 2012 (FY2012), RCEM's loan book, comprising cooperative loans and hire purchase loans, contracted by 7.4% to RM1.11 billion (FY2011: RM1.20 billion), following the temporary standstill of loan origination at KOWAJA from November 26, 2010 to June 9, 2011. RCEM's net interest income fell by 11.3% to RM170.2 million (FY2011: RM191.9 million) as a result of its shrinking loan book and margin compression from increased competition in the personal loan market. Given RCEM's lack of a write-off policy, its gross non-performing loans continued to accumulate to RM158.1 million (FY2011: RM120.3 million), representing a gross non-performing loans ratio of 14.3% (FY2011: 10.1%). MARC also notes that lower impairment allowances of RM15.8 million were charged in FY2012 to RCEM's income statement compared to the year before, causing its impairment reserve coverage to decline to 78.6% as at end-FY2012 from 92.0% as at end-FY2011. Nevertheless, the negative pressure on RCEM's credit profile is mitigated by the group's healthy liquidity buffer and capitalisation with cash and bank balances of RM382.3 million (FY2011: RM512.5 million) while its total shareholders' funds stood at RM439.0 million (FY2011: RM352.0 million) as at end-FY2012.

The stable outlook is based on MARC's expectations that RCEM's current credit standing will remain supportive of its obligation to maintain the covenanted collateral coverage for Class A and Class B notes. Negative rating action would likely be warranted in the event MARC believes that RCEM's ability to substitute new IER is impaired.

Contacts: Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my; Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

January 18, 2013