Published on 12 Jan 2018.
RAM Ratings has reaffirmed the AAA/stable rating of Cagamas MBS Berhad’s RM2.05 billion Sukuk Musyarakah Islamic Residential Mortgage-Backed Securities (CMBS 2005-1). Cagamas MBS is a limited-purpose entity incorporated for the purpose of securitising government staff housing loans and government staff Islamic home-financing (GSIHF).
The reaffirmation of the rating is premised on the transaction’s robust and improved credit support, in the form of an overcollateralisation (OC) ratio of 254.08% as at end-March 2017 (end-March 2016: 122.07%), following the return of capital on CMBS 2005-1’s Tranche 5 on the scheduled maturity of 8 August 2017. As at 31 March 2017, the OC ratio was backed by an outstanding portfolio worth RM1.14 billion as well as RM277.81 million of cash and permitted investments. This provides strong protection against the risk of prepayment and default on the underlying portfolio of GSIHF under an “AAA” stressed scenario, as well as negative variance on investment returns. The rating is also supported by the GSIHF’s non-discretionary repayment structure.
The transaction’s average monthly default rate had eased to 0.03% as at end-March 2017 (end-March 2016: 0.04%), against RAM’s base-case assumption of 0.04% monthly. The prepayment performance of the portfolio also remained stable, with the average monthly prepayment rate oscillating between 0.08% and 0.09% throughout the same period, in line with our expectation of 0.10% monthly. While the transaction allows the option of partial redemption for the last tranche, this has not been exercised as the cashflow arising from excess prepayments has yet to meet the projected amounts, despite having fulfilled the minimum threshold of RM66 million in the Collections Account. Premised on its current level of monthly collections, we expect the transaction to accumulate sufficient cashflow to fully redeem the remaining outstanding Sukuk on its maturity date.
Under the recently announced Budget 2018, civil servants and pensioners will enjoy respective one-off special payments of RM1,500 and RM750. This is in addition to the announced tax cuts for individuals and increased monthly minimum pensions for retirees who have given more than 25 years’ service. These measures are collectively expected to elevate disposable incomes. Along with the Government’s plans to provide more affordable housing and better access to financing schemes through new loan products and better eligibility criteria for civil servants, this should boost demand for staff housing loans.
We note that with the additional disposable income and easier access to finance, default rates on staff housing loans may improve slightly. That said, Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA) issued a directive - in November 2017 - on the strict compliance with the maximum salary deduction of 80% of gross income, which took effect in the same month for new loans. Going forward, LPPSA expects the annual funding for loans to civil servants to remain unchanged. Given the portfolio’s static nature, we do not expect any impact on this transaction.
Since LPPSA was corporatised in 2016, the integration of the new loan-management system to improve the overall efficiency of salary-deduction processes has been gradual: it is expected to be fully integrated by end-2018. While the loan-application and monitoring processes remain unchanged, LPPSA targets to complete the post-data-cleansing financial reporting by end-2018. In the interim, we expect to see some fluctuation in delinquency rates over the medium term. Apart from a reinforced recovery department and an enlarged panel of lawyers, LPPSA has also adopted general banking practices in terms of managing portfolio risk; any loan in arrears for 3 months or more will be considered non-performing. Going forward, such operational enhancements are expected to translate into better recovery prospects.
During the period under review, LPPSA’s servicing quality remained adequate. With all efforts in place to improve efficiency in the operational and administrative processes, we expect delinquency rates to stabilise going forward. RAM will continue monitoring the developments on this front and their potential impact, if any, on this transaction.
As at 31 March 2017, CMBS 2005-1’s portfolio of GSIHF comprised 28,312 accounts, with an average outstanding amount of RM40,212. The weighted-average term to maturity of the CMBS 2005-1 pool stood at 9.08 years.
Analytical contact
Irene Wong
(603) 7628 1076
irene@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
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