FW: RAM Ratings reaffirms rating of RCE-sponsored Tranche 1 Class A Sukuk, upgrades rating of Class B Sukuk

Published on 12 Sep 2017.

RAM Ratings has reaffirmed the AAA rating of Al-Dzahab Assets Berhad’s (the Issuer) RM95.0 million Tranche 1 Class A Sukuk and upgraded the rating for its RM25.0 million Tranche 1 Class B Sukuk, from AA3 to AA1. Concurrently, the outlook on the Class A Sukuk has been reaffirmed at stable; the outlook on the Class B Sukuk has been revised from stable to positive. The Tranche 1 Sukuk is the first issuance under Al Dzahab’s RM900.0 million Sukuk Murabahah Asset-Backed Securitisation Programme (the Programme); 3 issuances have been completed to date since June 2016, bringing the total rated amount to RM430.0 million. Tranche 1 is collateralised by a portfolio of personal-financing (PF) facilities (extended to civil servants) originated by RCE Marketing Sdn Bhd (RCEM) through its business partners, repaid via non-discretionary salary deductions processed by the Accountant General's Department and Angkatan Koperasi Kebangsaan Malaysia Berhad. This repayment mechanism substantially insulates the transaction from the credit risks of the borrowers, as long as they remain in active service.

The rating actions on the Class A and Class B Sukuk are premised on the securitised portfolio’s better-than-assumed default and prepayment performance, which have resulted in better credit support corresponding to their respective AAA and AA1 ratings. The revision of the Class B Sukuk’s rating outlook - from stable to positive - indicates that its rating may be raised further if the current performance of the underlying portfolio can be sustained in the near term. If so, we expect the collateral support for the Class B Sukuk to build up rapidly, to the extent that it will provide sufficient protection at a higher rating against losses from defaults and prepayments. Additionally, the transaction fully traps all residual cashflow until the 5th anniversary, when the Issuer may exercise its option to redeem all the Tranche 1 Sukuk outstanding at that time, thereby adding further credit protection to the Sukuk.

RAM’s cashflow assessment indicates that the underlying portfolio will be able to meet full and timely payment of the financial obligations on Tranche 1 under the respective “AAA” and “AA1” stress scenarios for the Class A and Class B Sukuk. The RM95.0 million Class A Sukuk and RM25.0 million Class B Sukuk are supported by receivables with an outstanding principal value of RM137.58 million plus RM22.4 million of cash reserves, translating into respective overcollateralisation ratios of 68.39% and 33.31%. 

During the period under review, Tranche 1’s performance came within RAM’s expectations, and also in line with that of the rest of Al Dzahab’s securitised portfolios. Monthly net defaults (as measured by RCEM) continued tracking RAM’s base-case expectations, as did prepayment patterns that fell within the assumed high and low scenarios, although we observe some seasonal behaviour during the same span. These had followed salary increments for civil servants in July 2016, as well as the launch of a one-off promotion by RCEM. Barring any new competitive terms introduced by market players or further salary hikes, we do not expect any significant increase in prepayments given the tighter lending regulations for personal financing. 

Despite disrupted collections earlier this year that had resulted in some deterioration in the ageing profile for the underlying portfolio of the Tranche 1 Sukuk, the portfolio has not shown any material credit impairment. The monthly collection rate for RCEM’s PF facilities recovered to above 100% in June amid the servicer’s increased collection efforts. All in all, we expect the portfolio’s performance to remain stable although we will maintain close monitoring on it. We believe that RCEM has sufficient experience and capabilities to manage the delinquencies and defaults on its receivables.  

Al Dzahab is a special-purpose vehicle incorporated to undertake the securitisation of receivables originated through the business partners of RCEM. Under the Programme, the Issuer will, from time to time, issue sukuk to fund its acquisition of PF portfolios. Stop-issuance trigger events prohibit further issuance under the Programme should the Servicer’s ability to perform its obligations – including servicing the PF facilities – become impaired.

 

Analytical contact
Irene Wong
(603) 7628 1076
Irene@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my