RAM reaffirms AAA rating of Cagamas MBS’s CMBS 2005-1

Published on 25 January 2013

RAM has reaffirmed the AAA rating (with a stable outlook) of Cagamas MBS Berhad’s (“Cagamas MBS”) RM2.05 billion Sukuk Musyarakah Islamic residential mortgage-backed securities (2005/2020), known as CMBS 2005-1. The reaffirmation is premised on the available collateral buffer in the form of a 69.33% overcollateralisation (“OC”) ratio as of the last reporting date of 8 August 2012, backed by the overall performance of the collateral pool and the structural features of the transaction. The stable outlook reflects RAM’s belief that the pattern of defaults and losses as well as prepayments on the government staff Islamic home-financing facilities (“GSIHFs”) will continue to fall within our expectations.

The OC ratio is calculated against RM1.89 billion of outstanding GSIHFs and RM351.39 million of cash and permitted investments. This level of OC provides sufficient protection against the risk of prepayment, negative variance of investment returns and defaults under an “AAA” stressed scenario. As of the same reporting date, the cumulative net default rate for the underlying financing portfolio stood at 0.49% (as a percentage of the principal balance on the purchase date), below RAM’s base-case assumption. The better-than-assumed default performance, had to some extent, compensated for the potential liquidity pressure arising from the lower-than-assumed cumulative prepayment rate of 7.45%.

The transaction allows for optional prepayment of the last tranche of CMBS 2005-1, i.e. Tranche A6, on the scheduled redemption date of each tranche, if there is excess cashflow arising from higher-than-assumed prepayments while maintaining a RM66 million minimum cash balance after prepayment. In the event the prepayment option becomes available, Cagamas MBS has undertaken to run a liquidity analysis before any decision to exercise the option. As such, we believe that any prepayment of Tranche A6 would not be detrimental to the rating of the transaction.

Under Budget 2013, the Government had announced an additional bonus of 1.5 months’ salary for the civil servants, with a minimum payment of RM500 to be paid over 3 instalments by January 2013. This was in addition to a pension increment and a one-off assistance for pensioners. Nonetheless, we envisage that the preferential interest rates on GSIHFs and mounting concerns over the rising cost of living will moderate any spikes in prepayment levels. On separate note, Bahagian Pinjaman Perumahan will be restructured as part of the authorities’ plans to consolidate the fiscal deficit to ease the Government’s financial burden. We do not envisage any significant changes in underwriting standards for civil servants, other than in loan administration, collections and monitoring processes. RAM will closely monitor the relevant developments and make announcements when necessary.

As at 31 March 2012, the portfolio of GSIHFs comprised 33,219 accounts, with an average outstanding balance of RM56,963 per account; the weighted-average remaining term came up to 13.71 years.

Media contact

Tan Han Nee

(603) 7628 1023

hannee@ram.com.my