RAM Ratings has assigned a final AA1/Stable rating to Malaysia Building Society Berhad's (MBSB or the Company) RM900 million Tranche 4 Structured Covered Sukuk (Tranche 4 Covered Sukuk) - the final issuance under the Company's RM3 billion Structured Covered Sukuk Commodity Murabahah Programme (the Programme). The Tranche 4 Covered Sukuk may be considered a form of covered bonds as the sukuk holders have dual recourse, i.e. first to the issuer (when solvent), and then to a pool of securitised assets (upon default by the issuer).
The AA1 rating is notched up from MBSB's long-term A2 financial institution rating (FIR) and reflects the quality of the securitised assets as well as the supporting securitisation structure. RAM highlights that the transaction benefits from a portfolio of cover assets (Tranche Cover Assets) comprising personal-financing receivables, via a guarantee extended by Jana Kapital Sdn Bhd. The underlying collateral is deemed of good quality given the non-discretionary direct salary deductions for repayment, which help minimise exposure to the credit risks of the borrowers. Based on our assessment, the transaction's interruption risk (I-risk - as defined in RAM's Approach to Analysis of Covered Bonds) is considered "average". Any change in MBSB's long-term FIR, the I-risk or the overcollateralisation (OC) ratio may lead to a change in the rating of the Structured Covered Sukuk.
MBSB's FIR incorporates our expectation of continuous shareholder support from the Employees Provident Fund, its largest shareholder. Nonetheless, the Company's credit profile remains constrained by its weak asset quality, with a gross impaired-financing ratio of 6.9% as at end-June 2015. The rating is also reflective of MBSB's weak funding and liquidity profile, although improving. That said, the Company's capitalisation is viewed to be sound, with further improvement expected given its planned funding programmes. Moving forward, we expect MBSB's profitability indicators to suffer from its aggressive impairment-provisioning policy.
The rating of the Tranche 4 Covered Sukuk is supported by an OC level of 37.7%, which we deem sufficient to protect against the risks of default and prepayment while allowing timely and full payment of profit and principal obligations on the Tranche 4 Covered Sukuk under an "AA1" stressed scenario. On the cut-off date of 31 August 2015, the initial pool of cover assets had a principal balance of RM1.23 billion, with a weighted-average (WA) seasoning period of 43 months, and carried a WA yield of 4.14%.
We highlight that the much higher apparent OC for the Tranche 4 Covered Sukuk is mainly due to the much longer tenure of the cover assets (WA remaining tenure of 17 years) vis-à-vis the Sukuk's tenure (13 years), as well as the narrower excess spread. The former has resulted in a considerable amount of cashflow not collected after the last scheduled maturity date. This has not been given any credit benefit in RAM's analysis, although it continues to form part of the security for the sukuk holders.
Meanwhile, liquidity risk is substantially mitigated as the Tranche 4 Cover Assets are almost static, with the Tranche 4 Covered Sukuk's redemption schedule matched against the securitised assets' expected cashflow under stressed conditions. This reduces exposure to market risk, particularly in a nascent covered-bond market where a sufficiently liquid and transparent market for the secondary trading of financial assets has yet to be established.
The transaction is exposed to some degree of commingling and clawback risks as salary deductions for repayment are first deposited into MBSB's account before being segregated and transferred to a designated account for the transaction. While the sukuk holders have security over the securitised assets, their access to these assets may be frustrated if MBSB becomes bankrupt or goes into liquidation. That said, we believe these risks are remote and moderated by the liquidity reserve account to bridge any cashflow interruption during the interim, when the cashflow switches from the issuer to the Tranche Cover Assets. This reserve threshold will increase if the rating drops to BBB3 or lower. To protect the interests of the sukuk holders, the transaction includes an asset coverage test (ACT) to ensure that the OC is maintained at a minimum of 37.7%, as well as various stop-issuance triggers to stop further issuance. Failure to remedy a breach of the ACT within 6 months will constitute an issuer event of default.
Media contact
Lim Chern Yit
(603) 7628 1035
chernyit@ram.com.my
© Press Release 2015
