MARC AFFIRMS RATINGS ON RCE ADVANCE SDN BHD'S RM420.0 MILLION FIXED RATE MTN PROGRAMME; OUTLOOK REVISED TO NEGATIVE

FOR IMMEDIATE RELEASE

MARC has affirmed A+, A and BBB+ ratings on RCE Advance Sdn Bhd’s (RCEA) outstanding Class A, Class B and Class C notes of RM45 million, RM35 million and RM60 million respectively under its RM420 million Fixed Rated Medium Term Notes (MTN) Programme. The outlook on the ratings is revised to negative from stable.

RCEA acquired six collateral pools consisting of identified eligible receivables (IER) from its parent company, RCE Marketing Sdn Bhd (RCEM) from the proceeds from the rated MTN programme. The IER pool comprises solely of personal loans granted to government servants who are members of Koperasi Wawasan Pekerja-Pekerja Berhad (KOWAJA). The monthly instalments which are made via direct salary deductions from government servants form the source of coupon and principal repayments of the MTN Programme.

The ratings on the Class A and Class B notes of A+ and A incorporate the credit support provided by the collateral pool and RCEM’s standalone credit profile. The credit support is in the form of an undertaking by RCEM to replace defaulted and prepaid IER and/or provide funds to maintain a three-month coverage ratio of at least 1.66 times on the collateral backing the notes. As a result Class A and Class B notes receive a two-notch and one-notch rating uplift respectively above MARC’s corporate credit rating (CCR) on RCEM of A-. The Class C notes continue to be rated one-notch below RCEM’s CCR to reflect its subordination to Class A and Class B notes in respect of coupon and principal repayments. The rated notes benefit from an irrevocable corporate guarantee from ultimate parent RCE Capital Berhad (RCE Capital) which relies on RCEM for more than 90% of its consolidated revenue. In view of the significant credit linkages between the notes and RCEM, the ratings of the notes are sensitive to changes in the credit strength of RCEM.

The negative outlook on the ratings reflect RCEM’s weakening standalone credit profile. RCEM which provides personal financing mainly through tie-ups with cooperatives has been affected by the changing dynamics of the personal loan financing segment. For financial year ended March 31, 2014 (FY2014), RCEM’s net interest income contracted by 22.2% y-o-y to RM90.0 million as a result of tighter financing regulations which had led to a slowdown in lending and loan refinancing activities. RCEM’s profitability remains subdued with net interest margin continuing to decrease to 7.08% (FY2013: 8.56%) in FY2014. In addition, with the hike in overnight policy rate by Bank Negara Malaysia in July 2014, RCEM is expected to experience further margin compression given its reliance on borrowings to generate loans. The company’s net gearing was higher at RM285.4 million (FY2013: RM252.6 million) in FY2014. 

While RCEM has substitutable loan receivables of over RM200 million for the collateral pool, MARC remains concerned over RCEM’s shrinking loan book over the past five financial years, which may exert pressure on the company’s loan origination and substitution capabilities. For the period under review (October 2013 – September 2014), RCEM provided RM10.9 million (last review: RM39.8 million) worth of new performing IER to the collateral pool. During the period under review, RCEA’s actual collections of RM29.6 million exceeded the projected collections of RM26.8 million due to early prepayments. The prepayment rate for the period under review was higher at 1.72% (last review: 0.58%) as a result of in-house refinancing.

The average monthly delinquency and default rates remained low at 0.03% and 0.28% respectively. As at September 30, 2014, the collateral pool which consists of 5,324 loans totalling RM108.9 million remained in compliance with the minimum three-month collateral coverage. The current cash balance of RM26.4 million in the designed accounts covers more than 50% of the profit servicing and principal redemptions on the rated notes of about RM45.4 million for the period between October 1, 2014 and September 30, 2015. In the event of insufficient funds to meet note obligations, the security trustee on behalf of noteholders has the right to exercise the power of attorney to dispose the collateral assets. The rating agency expects the performance of the collateral pools to be supported by the at-source salary deductions of government servants.

The ratings of the notes could be lowered over the next six to 12 months should there be further erosion in RCEM’s key financial metrics, particularly its net interest income and margin, liquidity buffer and/or capital adequacy measures. Conversely, the rating outlook could revert to stable if RCEM demonstrates meaningful improvement in its business and financial profiles to a level that would commensurate with its current rating band.

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

December 26, 2014