RAM Ratings has maintained the AA1/-/-/RW_Developing rating of Malaysia Building Society Berhad’s (MBSB or the Issuer) RM495 million Tranche 1 Structured Covered Sukuk (Tranche 1 Sukuk).

Published on 01 October 2014

RAM Ratings has maintained the AA1/-/-/RW_Developing rating of Malaysia Building Society Berhad’s (MBSB or the Issuer) RM495 million Tranche 1 Structured Covered Sukuk (Tranche 1 Sukuk). The Rating Watch with a developing outlook is concurrent with RAM’s decision to put MBSB’s financial institution ratings (FIRs) on Rating Watch with a developing outlook, triggered by the 10 July 2014 announcement that CIMB, RHB and MBSB had obtained Bank Negara Malaysia’s approval to commence negotiations on the merger of their businesses and the creation of an enlarged Islamic banking franchise.
The Tranche 1 Sukuk is the first issuance under MBSB’s RM3 billion Structured Covered Sukuk Commodity Murabahah Programme. The sukuk may be considered a form of covered bond as the investors have dual recourse, first to the Issuer (when solvent), and then to a pool of Tranche Cover Assets (upon the Issuer’s default). The 4-notch rating uplift from MBSB’s long-term FIR is in line with the maximum rating uplift provided under RAM’s methodology on covered bonds, given the “average” interruption-risk assessment for this transaction and the available overcollateralisation (OC) buffer that commensurates with an AA1 ¬stressed scenario.
The Tranche Cover Assets consist of a portfolio of non-discretionary salary-deducted personal financing facilities for civil servants originated by MBSB, with a disbursement amount of up to 60% of the borrower’s monthly gross income. As at 31 March 2014, the 16.9% OC level was supported by RM540.17 million of outstanding receivables and RM38.40 million of cash and permitted investments, i.e. safely above the 15.3% required under the Asset Coverage Test. The portfolio’s principal balance was underpinned by 11,807 financing facilities, with a weighted-average seasoning of 22 months. The average financing size worked out to RM45,750, with a weighted-average remaining term-to-maturity of 87 months. The cumulative net default rate of the Tranche Cover Assets stood at 0.06% - below our base cumulative default rate of 0.28%. This is, however, moderated by a higher-than-expected average monthly prepayment rate of 0.25%, against our expectation of 0.16% under the ”high prepayment” scenario.
While we understand that there has been a slight uptick in the attrition rate of civil servants, we have not observed any major impact on this portfolio. The higher-than-expected prepayment rate is also due to the refinancing of older financing facilities within the portfolio. Going forward, prepayments rates may remain elevated in the near term given that approximately 34% of the outstanding number of financing facilities (or 17% of the total outstanding principal) has remaining tenures of less than 5 years, with borrowers opting to refinance despite the tighter credit conditions. Having said that, we expect prepayment rates to move closer in line with our expectations once the receivables with shorter remaining tenures run down.

Media contact
Lim Chern Yit
(603) 7628 1035
chernyit@ram.com.my