Published on 18 November 2014
RAM Ratings has assigned a preliminary rating
of AA1 with a positive Rating Watch to Malaysia Building Society
Berhad’s (MBSB) proposed RM700 million Tranche 2 Structured Covered
Sukuk (Tranche 2 Sukuk). The Tranche 2 Sukuk represents the second
issuance under MBSB’s RM3 billion Structured Covered Sukuk Commodity Murabahah Programme.
The transaction may be considered a form of covered bond as the sukuk
holders have dual recourse, first to the issuer (when solvent), and then
to a pool of securitised assets (upon the issuer’s default).
The AA1 rating is notched up from MBSB’s long-term A2
financial institution rating and reflects the quality of the
securitised assets as well as the supporting securitisation structure.
The positive Rating Watch mirrors our view that the merged entities’
credit profile will commensurate with the highest ratings on RAM’s
national scale if the proposed merger of CIMB Islamic Bank Berhad (rated
AAA/Stable/P1 by RAM), RHB Islamic Bank Berhad (rated
AA2/-/P1/RW_Positive by RAM) and MBSB to form a mega Islamic bank
materialises.
RAM highlights that the transaction benefits from a
portfolio of cover assets (Tranche Cover Assets) comprising
personal-financing receivables, via a guarantee extended by Jana Kapital
Sdn Bhd. The underlying collateral is viewed to be of good quality
given the non-discretionary direct salary deductions for repayment,
which help minimise exposure to the borrowers’ credit risks. Any change
in MBSB's long-term rating, the interruption-risk (“I-risk” - as defined
in RAM’s approach on analysis of Covered Bonds) or the
overcollateralisation (OC) ratio may lead to a change in the Structured
Covered Sukuk’s rating. The rating is also provisional upon RAM’s
satisfactory review of the transaction documents, the final financing
portfolio, the expected tax liabilities and the assumptions that are
employed in this transaction.
Based on RAM’s cashflow assessment, the available OC
of 19.1% provides sufficient protection against the risks of default and
prepayment while allowing timely payment of the profit and principal
obligations on the Tranche 2 Sukuk under an “AA1” stressed scenario.
Liquidity risk is substantially mitigated as the Tranche Cover Assets
are near-static, with the Tranche 2 Sukuk’s redemption schedule matched
against the securitised assets’ expected cashflow under stressed
conditions. This reduces exposure to market risk, particularly in a
nascent covered-bond market where a sufficiently liquid and transparent
market for the secondary trading of financial assets has yet to be
established. While the transaction’s I-Risk is currently considered
“average”, we highlight that there could be changes after the merger
that could affect the sukuk holders’ timely access to the Cover Assets
upon the issuer’s default. RAM will look out for any potential
implications that may arise following the merger and reassess the I-Risk
upon further clarity.
The transaction is exposed to some degree of
commingling and clawback risks as salary deductions for repayment are
first deposited into MBSB’s account before being segregated and
transferred to the designated account for the transaction. While the
sukuk holders have security over the securitised assets, their access to
these assets may be frustrated in the event MBSB becomes bankrupt or
goes into liquidation. That said, we believe these risks are remote and
moderated by the cash reserve account to bridge any cashflow
interruption during the interim period, when the cashflow switches from
the issuer to the Tranche Cover Assets. This reserve threshold will
increase if the rating drops to BBB3 or lower. To protect the interests
of the sukuk holders, the transaction includes an asset coverage test
(ACT) to ensure that the OC is maintained at the minimum level of 19.1%
as well as various Stop-Issuance Triggers to stop further issuance. A
breach of the ACT that is not remedied within 6 months will constitute
an issuer event of default.
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