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10 Aug | Thursday
RAM Ratings assigns preliminary AAA/Stable and AA3/Stable ratings to RCE-sponsored Tranche 4 sukuk

RAM Ratings has assigned preliminary AAA/Stable and AA3/Stable ratings to Al Dzahab Assets Berhad’s (the Issuer) RM[130.0] million Class A Sukuk and RM[30.0] million Class B Sukuk, respectively. These represent the fourth issuance under Al Dzahab’s RM900.0 million Sukuk Murabahah Asset-Backed Securitisation Programme (the Programme); 3 issuances have been completed to date since June 2016, with a total rated amount of RM430 million. Similar to previous tranches, this issuance will also be collateralised by personal-financing (PF) facilities (extended to civil servants) originated by RCE Marketing Sdn Bhd (RCEM) through its business partners. These facilities are repaid via non-discretionary salary deductions processed by the Accountant General's Department (AG) and Angkatan Koperasi Kebangsaan Malaysia Berhad, thereby substantially insulating the transaction from the credit risks of the borrowers as long as they remain in active service.
 
RAM’s cashflow assessment indicates that the underlying portfolio will be able to meet full and timely payment of the financial obligations of Tranche 4 under respective “AAA” and “AA3” stress scenarios for the Class A and Class B Sukuk. This is consistent with what had been applied to Tranches 1 to 3, i.e. at multiples of 4.00 and 2.75 times, respectively, of the applied base default. The RM[130.0] million Class A Sukuk and RM[30.0] million Class B Sukuk will be backed by receivables with outstanding principal values of RM[174.1] million and RM[4.2] million of cash reserve balances, translating into respective overcollateralisation (OC) ratios of [37.16]% and [11.44]%. Tranche 4’s improved required OC ratios relative to the earlier issuances, particularly Tranches 1 and 2, reflect its better available excess spread as a result of higher portfolio yield and lower overall indicative transaction financing cost.
 
Up to June 2017, the monthly prepayment rates for the respective portfolios backing Tranches 1 to 3 remained within our low- and high-prepayment stress assumptions. We observe some pick-up in prepayments after the salary increments for civil servants in July 2016, albeit not significant. We believe that the extent of releveraging is unlikely to trigger the same levels of prepayment experienced in the past, given that the loan amounts are capped at a percentage of their net salaries, with a maximum loan tenure of 10 years compared to the previous 20 years.
  
To date, the respective underlying portfolios of Tranches 1 to 3 have shown better-than-assumed loss performance, albeit still unseasoned. Over the same period, RCEM’s receivables ageing profile remained stable while its average monthly collections for its PF facilities were kept at above 100%, despite a temporary 2-month disruption seen; this was subsequently resolved in the following month.Going forward, we are cautious that the debt-servicing ability of households, particularly lower-income earners, could weaken following the introduction of more accessible financing avenues for the affordable home schemes. Furthermore, Lembaga Pembiayaan Perumahan Sector Awam (LPPSA) – the public-sector mortgage financier - ranks above co-operatives and foundations in terms of priority in salary deductions, which could increase the risk of shortfalls in deductions if the deduction limit of 60% is not strictly adhered to. That said, we believe RCEM has sufficient experience and capabilities to keep the delinquencies and defaults of its receivables manageable.
 
Al Dzahab is a special-purpose vehicle incorporated to undertake the securitisation of receivables originated through the business partners of RCEM. Under the Programme, the Issuer will, from time to time, issue sukuk to fund its acquisition of PF portfolios. Stop-issuance trigger events prohibit further issuance under the Programme should the Servicer’s ability to perform its obligations – including servicing the PF facilities – become impaired.

source: RAM Rating Services Berhad
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