FW: RAM Ratings lifts Rating Watch on Cendana Sejati's Senior Sukuk, downgrades rating to BB2 with negative outlook

 

Published on 07 Dec 2017.

RAM Ratings has lifted the negative Rating Watch on Cendana Sejati Sdn Bhd’s (the Issuer) RM360 million Senior Sukuk Murabahah MTN Programme (2015/2025) (the Programme). Concurrently, we have downgraded the Programme’s long-term rating from AA1 to BB2, and revised its outlook to negative. As at end-September 2017, the RM70 million Senior Sukuk (comprising the Tranche 1, Tranche 1A, Tranche 2 and Tranche 3 Senior Sukuk) and RM9 million Junior Sukuk remained outstanding. The Senior Sukuk is backed by a portfolio of consumer-financing receivables to civil servants, with a principal balance of RM68 million as of the same date. The Junior Sukuk is unrated and unsecured.

The Programme’s rating was first placed on Rating Watch on 29 September 2017, reflecting our concerns about its considerable liquidity risk and severely eroded collateral buffer following the restructuring of more than 90% of these receivables, which had significantly reduced monthly instalments and substantially extended the tenures under the portfolio. To address the shortfall in monthly cashflow as well as to ensure the prompt and continued performance of the Senior Sukuk’s obligations, the Originator – Masraf Al Barakah Sdn Bhd (Masraf) – has proposed to inject new, shorter-tenured receivables into the transaction via the staggered issuance of additional Junior Sukuk over the next 3 years. 

The resolution of the negative Rating Watch and the downgrade follow the finalisation of Masraf’s plans to address the substantial shortfall in monthly collections. The rating outlook has been revised to negative as RAM believes that Masraf’s remedial actions are still subject to ramp-up risk. The outlook also reflects the high likelihood of further multi-notch rating downgrades as the transaction approaches the Senior Sukuk’s respective maturities, given the portfolio’s altered repayment profile.

We understand that this issue had been triggered by lower scheduled instalments deducted for the affected securitised financing by the Accountant General’s Department - the transaction’s primary agency administering salaries – effective January 2017. The lower deductions will lengthen the repayment period for a substantial portion of the portfolio, if the shortfall is not remedied through other means. While Masraf’s initial plan had been to restructure these loans, it has since decided to pursue the delinquent amounts through over-the-counter payments or early settlement. We note, however, that these can only be effected from December onwards, once its IT infrastructure is able to cater for such payments. In the short term, the transaction should have sufficient cashflow based on the portfolio’s current performance and the available cash reserves to meet the next 3 years’ profit payments as well as the RM10 million principal redemption due in February 2021. 

Together with Masraf’s plan to inject new receivables, this should help manage the liquidity pressure on the transaction as the first principal maturity approaches. That said, we do not believe it will be sufficient to restore the credit support to a level consistent with our previous expectations. RAM will continue to closely monitor the transaction’s performance and the Originator’s commitment to ensuring the continued performance of the transaction, and reassess the impact accordingly. For now, we have not ascribed any credit benefit to external support from Masraf. Given the rating downgrade to BB2 for the Programme, no further dividends will be allowed under the Junior Sukuk.

The Senior Sukuk had been issued together with Cendana Sejati’s Junior Sukuk under its Junior Sukuk Murabahah MTN Programme, to fund the purchase of consumer-financing receivables originated by Masraf. These receivables arise from credit sales to civil employees for the purchase of products. The source of repayment for the Senior Sukuk comprises collections by Coshare Holdings Berhad – a company related to Cendana Sejati – through its automatic salary-deduction mechanism.

 

Analytical contact
Chin Jin Han
(603) 7628 1168
jinhan@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my