MARC downgraded ratings on the RM335 million Super Senior B and RM190 million Senior primary CLO bonds by Prima Uno Berhad

MARC (Apr 12, 2011) - MARC has downgraded its ratings on the RM335 million Super Senior B and RM190 million Senior primary collateralised loan obligation bonds issued by Prima Uno Berhad (Prima Uno) to A- and C from AA+ and BB respectively. At the same time, MARC affirms the ratings of the remaining classes at AAA for the RM290 million Super Senior A bonds and C for both the RM40 million Mezzanine and RM95 million Subordinated bonds. The rating outlook on the Super Senior A, Super Senior B and Senior bonds remains negative.

The lowered ratings reflect continued deterioration in collateralisation ratios and credit quality of the loan portfolio as well as reduced tolerance to further loan defaults from obligors with weak liquidity positions. Since the last review in August 2010, five obligors have been downgraded, out of which two were downgraded to D upon failure to meet interest payments on January 21, 2011, bringing the total number of defaulted obligors to 10. As of March 10, 2011, the loan portfolio comprises 22 performing corporate loans of RM614.0 million, down from RM740.0 million as at July 26, 2010; one obligor has prepaid its entire RM20.0 million loan. The reduced loan portfolio has resulted in lower collateralisation ratios of 107.5%, 80.7% and 76.7% for the Super Senior B, Senior and Mezzanine bonds respectively (last review: 118.4%, 90.8% and 86.5% respectively). MARC believes that recovery prospects on the defaulted loans are poor based on the credit profiles of the defaulted obligors and continues to assume zero recovery of principal outstanding. Additionally, the agency views the collectibility of loans subject to mandatory prepayment as uncertain. The number of obligors downgraded below the BBB threshold stood at 13 as at March 10, 2011, affecting a total of RM323.0 million of loans.

Meanwhile, the affirmed rating on the Super Senior A bonds reflects a strong collateralisation ratio of 260.2%, and the bonds’ ability to withstand loan defaults in a MARC ‘AAA’ stressed scenario.

Further supporting the bonds are RM45.1 million of balances in the Liquidity Reserve Account (LRA) as at March 10, 2011, following RM72.3 million in prepayments from six obligors on January 26, 2011. An extraordinary resolution was passed on December 6, 2010 allowing obligors to make partial or full prepayment of outstanding loans under the loan portfolio. The bulk of the prepayments were used to redeem RM54.1 million in Super Senior A bonds, leaving outstanding bonds at RM235.9 million. The funds in the LRA are sufficient to cover at least the coupon payments on the CLO bonds for the remaining two payment dates up to maturity on January 26, 2012.

As at March 10, 2011, the portfolio’s weighted average rating (WAR) factor improved to 9.99 (A-/BBB+), from 15.1 (BBB) with the exclusion of the two most recent defaulted obligors from the WAR computation. Based on the WAR and projected tenure-adjusted default rates, MARC’s cash flow sensitivity results continue to show that while Super Senior A and Super Senior B bonds can still withstand a ‘AAA’ stress scenario, the Senior and Mezzanine bonds are exposed to a very high likelihood of default at maturity. The Super Senior A bonds are able to withstand about six more obligor defaults of RM40 million each before failing to meet its minimum required collateralisation ratio of 150%. However, the Super Senior B bonds can only withstand two obligor defaults before principal impairment occurs.

The negative rating outlook on the corresponding bonds reflects MARC’s expectations of further downward obligor rating migration as MARC foresees continued pressure on the credit quality of lower-rated performing obligors.

Full article: www.marc.com.my