MARC has affirmed its A+, A and BBB+ ratings on RCE Advance Sdn Bhd’s (RCEA) outstanding Class A, B and C notes of RM65 million, RM55 million and RM60 million respectively.

Dec 27, 2013 -
MARC has affirmed its A+, A and BBB+ ratings on RCE Advance Sdn Bhd’s (RCEA) outstanding Class A, B and C notes of RM65 million, RM55 million and RM60 million respectively. The notes were issued under RCEA’s RM420 million Fixed Rate Medium Term Notes (MTN) Programme. The outlook on the ratings is stable. RCEA is a wholly-owned special purpose financing vehicle of RCE Marketing Sdn Bhd (RCEM).
The ‘A+’ and ‘A’ ratings on the Class A and Class B notes combine RCEM’s standalone credit profile and credit support provided by collateral pools and cash in designated accounts. The credit support remains commensurate with the two-notch and one-notch uplift above MARC’s corporate credit rating (CCR) on RCEM incorporated in the ratings on the Class A and Class B notes respectively. RCEA’s three-month collateral coverage ratio, which is computed as the outstanding balance of collateral portfolios over the principal balance of Class A and Class B notes (net of funds in designated accounts), continued to be in compliance with its minimum required level of 166%. As at September 30, 2013, the collateral coverage ratio for Class A and Class B notes was 166%; in addition to the collateral pools comprised outstanding loans of RM149.2 million, the notes were also backed by RM45.3 million of funds in designated accounts. The collateral pools are performing adequately, with an average monthly default rate of 0.64% for the period October 2012 to September 2013.
The Class C notes are rated ‘BBB+’, one notch below RCEM’s CCR to reflect its subordination to RCEA’s outstanding senior notes in payment of coupon and principal. The ratings on all three classes of notes are broadly sensitive to a change in the credit profile of RCEM in light of the direct credit linkage between RCEA and RCEM through the shareholder’s undertaking from RCEM to ensure that the aforementioned three-month collateral coverage ratio is maintained above or at the minimum required level, defaulted and prepaid loans are replaced, and RCEA’s debt service reserve account is adequately funded. While all three classes of notes benefit from an irrevocable corporate guarantee from ultimate holding company RCE Capital Berhad (RCE Capital), MARC notes that RCEM is the main operating entity of the RCE Group and contributes over 90% of the group’s consolidated revenue and net profit. The rating agency expects any support to RCEA to flow directly from the parent rather than through RCE Capital.
RCEM’s stand alone credit profile, meanwhile, reflects its small franchise mostly as a provider of personal financing through tie-ups with cooperatives, ample liquidity and adequate asset quality. RCEM’s earnings for the financial year ended March 31, 2013 (FY2013) were impacted by a fairly sharp increase in impairment charges, as well as a contraction in its loan book and net interest margin (NIM) compression. The increase in RCEM’s credit costs was mainly caused by its implementation of stricter classification of non-performing loans in January 2013. RCEM’s higher balances of low yielding deposits and placements with financial institutions also weighed on its NIM. Given the recent measures by authorities to curb consumer credit growth and elevated competitive environment, MARC expects meaningful loan growth to remain challenging for RCEM over the next year. The downside risk to RCEM’s stand alone credit profile is currently limited by its satisfactory capitalisation, the rather subdued near-to-intermediate term outlook for balance sheet growth and its strong liquidity position.
MARC’s analysis on the performance of RCEA’s collateral pools is based on monthly servicer reports provided as of September 30, 2013. The current collateral pools consist of identified eligible receivables (IER) or more specifically, personal loans granted to government employees who are members of Koperasi Wawasan Pekerja-Pekerja Berhad (KOWAJA) serviced by Angkatan Koperasi Kebangsaan Malaysia Berhad (ANGKASA) through at-source salary deductions. Based on the servicer reports, MARC concludes that the quality of the collateral pools continues to be stable, despite the rise in reported average monthly default rate to 0.64%. Actual monthly collections have remained in line with the rating agency’s expectations. Prepayment rates, on the other hand, have trended lower. RCEM provided RM39.8 million of new IER to replace prepaid and defaulted IER during the period under review, up from RM33.6 million in MARC’s 2012 review. RCEM’s ability to replace prepaid and defaulted IER on an ongoing basis is supported by the availability of sufficient eligible assets and its ability to provide cash collateral in the unlikely event that it is unable to add loans in an amount sufficient to maintain the three-month collateral coverage ratio.
The stable outlook reflects MARC’s opinion that a material deterioration in RCEM’s standalone credit profile and/or level of credit support provided by the transaction’s collateral pools will be unlikely in the next 12 to 18 months. The rating agency expects the collateral pools backing Class A and B notes to demonstrate reasonable resilience to asset quality stresses, assisted by the at-source salary deductions of borrowers.
Contacts:
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.