RAM Ratings reaffirms ratings of Premium Commerce's Notes Series 2010-A

Published on 30 June 2011
RAM Ratings has reaffirmed the respective AAA and AA2 ratings of Premium Commerce Berhad’s (PCB) RM211 million Class A and Class B Notes Series 2010-A (collectively, Notes Series 2010-A), with a stable outlook. As at 4 May 2011, RM163 million of the Class A and Class B Notes remained outstanding.

This transaction involves the securitisation of automobile hire-purchase (HP) receivables from Tan Chong & Sons Motor Company Sdn Bhd (TCSM) and TC Capital Resources Sdn Bhd (TC Cap) under PCB’s RM2 billion Medium-Term Notes (MTN) Programme.

The reaffirmation of Notes Series 2010-A’s ratings reflects the available credit enhancement provided by the overcollateralisation (OC) ratios supported by the HP receivables securitised under Note Series 2010-A. The OC ratios for the Class A and Class B Notes stand at a respective 12.45% and 8.32%. While the current OC ratios amply support even higher levels of stress for the Class B Notes, they are required given the higher-than-expected default levels observed in the most recent static-pool data in 4Q 2010. RAM Ratings will continue monitoring the portfolio’s performance to ascertain that default and prepayment levels remain stable, without diluting the available credit enhancement.

The average monthly net default rate in recent months has averaged at 0.01% (based on the initial HP principal balance) - well within our monthly ramp-up default assumption of 0.03%. Meanwhile, the average monthly prepayment rate stands at 0.25% - lower than our monthly high-prepayment-rate assumption of 1.25% but lower than the low-prepayment-rate assumption of 0.30%. Given the 25-basis-point increase in the overnight policy rate in May 2011 and expectations of further rate hikes in 2H 2011, we do not envisage prepayments to rise as any spike in interest rates will reduce borrowers’ incentive to refinance.

Meanwhile, the ratings are also supported by the transaction’s legal and payment structures. This mainly involves the pass-through mechanism that allows any collections - after meeting senior expenses and coupon obligations - to be deployed for early redemption of the Notes on each quarterly coupon-payment date, in the pre-determined order of priority. This partially addresses the negative carry of the Notes Series due to low investment returns.

RAM Ratings notes that TC Cap's capacity to manage a rapidly expanding loan portfolio remains a moderating factor for the transaction. The challenge in managing a growing loan portfolio may had in turn affected the underlying HP receivables as well as the efficacy of the Servicer’s collection and monitoring procedures. We have factored this risk in to our cashflow assessment, having revised our default assumption in November 2010. Nonetheless, we note that TC Cap has made some effort to improve its operations, such as upgrading its information-technology system and strengthening its human-capital base. At the same time, TC Cap has also improved the credit quality of its loans by tightening its internal credit-assessment guidelines, particularly on loan applications for the purchase of "mass market" car models. Since the changes, we have observed lower default rates in the latest 2009 static pool.

As at 30 April 2011, the HP receivables in the portfolio comprised 3,586 HP contracts, with an outstanding principal balance of RM168.40 million. These loans had a weighted-average seasoning of about 20 months and a weighted-average remaining tenure of 48 months. The average size of the loans stood at RM51,882 as at the same date.

Media contact
Ang Swee Ee
(603) 7628 1113
sweeee@ram.com.my