RAM Ratings upgrades rating of Tan Chong’s sponsored Class B Notes Series 2013-A, to AAA

Published on 11 November 2014

RAM Ratings has upgraded the rating of Premium Commerce Berhad’s (PCB) RM5 million Class B Notes Series 2013-A (Class B Notes) from AA2 to AAA, while reaffirming the AAA rating of its RM157 million outstanding Class A Notes Series 2013-A (Class A Notes) (collectively known as the “2013-A Notes”). Both ratings have a stable outlook. This transaction involves the securitisation of automobile hire-purchase (HP) receivables from TC Capital Resources Sdn Bhd (TC Cap) under PCB’s RM2 billion HP Receivables-backed MTN Programme. TC Cap is the HP financing arm of Tan Chong Motor Holdings Berhad (Tan Chong), which in turn holds the sole rights for the assembly and distribution of Nissan and Ultimate Dependability vehicles in Malaysia.

The upgraded rating of the Class B Notes is premised on the better-than-expected performance of the securitised pool and the deleveraging of the transaction, which had strengthened its collateral coverage. This coverage, in the form of overcollateralisation (OC), provides sufficient protection against the risk of prepayments and defaults under the “AAA” stress rating scenario. As at end-August 2014, the respective OC ratios of the Class A and Class B Notes had improved from 10.15% and 7.11% to 12.70% and 9.23%, respectively. The OC was supported by a principal balance of RM158.97 million on the HP receivables and RM17.97 million of available cash.

The cumulative net default rate of HP receivables under the 2013-A Notes stood at 0.01% as at 31 August 2014, below our base-case rate of 0.56%. The monthly prepayment rate, however, averaged 0.19%, versus our low-prepayment-rate assumption of 0.3%. While the low prepayment rates could potentially introduce liquidity risk to the transaction, this risk is moderated by the lower-than-expected default rates of the portfolio.

The ratings are further supported by the transaction’s legal and payment structures. These include a pass-through mechanism which reduces any potential negative carry arising from low reinvestment returns, and a RM1 million Liquidity Facility Reserve that acts as a buffer to cover shortfalls in senior expenses and coupon payments on the Class A Notes.

Meanwhile, the portfolio is heavily concentrated in loans backed by the Almera vehicle model (66% of the total principal balance). Given that the car model’s target market could potentially be more sensitive to macroeconomic factors such as inflation and interest rate, the Notes is more susceptible to deterioration in asset quality. That said, we understand that Tan Chong has been selective in approving Almera loans.

Media contact
Evelyn Khoo
(603) 7628 1075
evelyn@ram.com.my