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Press Release
12 Jun | Tuesday
RAM Ratings reaffirms AAA/Stable rating of Cagamas MBS’s CMBS 2007-1-i
RAM Ratings has reaffirmed the AAA/Stable rating of Cagamas MBS Berhad’s RM2.11 billion Sukuk Musyarakah Islamic residential mortgage-backed securities (2007/2027) (CMBS 2007-1-i). Cagamas MBS is a limited-purpose entity incorporated for the purpose of securitising government staff housing loans and government staff Islamic home-financing facilities (GSIHFs).
 
The reaffirmation of the rating is based on CMBS 2007-1-i’s superior collateral coverage – its overcollateralisation (OC) ratio had risen to 68.4% as at the reporting date of 29 November 2017 (29 November 2016: 45.3%). The higher OC ratio is attributable to the securitised portfolio’s positive performance and the redemption of the RM400 million Tranche 4 sukuk during the review period, subsequent to which RM855 million remains outstanding. The OC ratio is backed by an outstanding mortgage principal of RM1.3 billion and RM170.8 million in cash and permitted investments. The significant credit support provides a more than sufficient buffer against default and prepayment levels under an AAA stressed scenario as well as negative variance on investment returns. Further, the rating is supported by the GSHIFs’ non-discretionary repayment structure, which reduces exposure to the credit risk of borrowers.
 
During the review period, CMBS 2007-1-i’s monthly net default rate and prepayment rate, on average, was less than 0.01% and around 0.08%, respectively. These translated into corresponding cumulative net default and prepayment rates of 0.62% and 10.75%, compared to our base-case assumptions of 5.33% and 20.20%. The option to partially redeem the last two tranches of the sukuk, although permitted, has not been exercised, as cashflow arising from excess prepayments has yet to meet the projected amounts, despite having fulfilled the minimum threshold of RM90 million in the Collections Account.
 
The Government (under the previous administration) had earlier announced a slew of benefits in April 2018, including salary increases equivalent to one annual increment beginning July 2018 and a 1% increment for pensioners in addition to the 2% received since January 2018. However, these are currently under review by the new administration, though it recently had agreed to provide RM200-400 in special aid to certain grades of civil servants and retirees. The benefits, if materialised, would increase the disposable incomes of civil servants. Any incidences of prepayments arising from early settlements of borrowers’ existing second home loans to enable them to qualify for new mortgages have been negligible so far.
 
Although Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA) – the servicer of the portfolio – was corporatised in 2016, its mandate to provide home financing to civil servants has remained the same. The development of a new Loan Management System (LMS) to improve the efficiency of operational and administrative processes for salary deductions is still ongoing, and is expected to come online by January 2019. Subsequently, the current Sistem Pinjaman Perumahan Bersepadu (Housing Loan System) platform will be migrated to the LMS. LPPSA is also conducting a data cleansing exercise that should be completed by end-2018. In the interim, there may be some fluctuation in delinquency rates as a result. Separately, improvements to LPPSA’s collection and recovery processes over the course of 2017 had led to improved recoveries on a y-o-y basis.
 
In view of the new administration’s proposed move to cap the number of ministries at 25, albeit by retaining the existing workforce, some civil servants may be redeployed or seconded to agencies to be corporatised. As such, some movement in the mortgage delinquency profile may be seen in the short term, though this would be moderated by the improved efficiency of LPPSA’s operational and administrative processes. The new government’s review of the employment of political appointees who are contract staff is unlikely to impact mortgages originated by LPPSA or those under the securitised portfolio, as these borrowers do not fulfil the former’s eligibility criteria. We do not envisage material changes to the organisation’s operations going forward. Although the securitised portfolio’s performance is not expected to alter significantly given potential redeployments, RAM will continue to monitor developments closely and assess their effect on the transaction, if any.
 
In November 2017, LPPSA had issued a directive to ensure strict compliance with the maximum salary deduction of 80% of gross income, which had become applicable in the same month to new loans. In view of the portfolio’s static nature, we do not anticipate any impact on the transaction. All in, the board’s servicing quality was adequate during the review period.
 
As at 31 July 2017, the portfolio of GSIHFs comprised 21,160 accounts, with an average outstanding balance of RM59,949. The weighted-average term to maturity of the CMBS 2007-1-i pool stood at 11.27 years as at the same date. 
 
 
 
Analytical contact
Chin Jin Han
(603) 7628 1168
jinhan@ram.com.my
 
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
 
 
Date of release: 12 June 2018
 
 
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
 
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
 
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
 
Published by RAM Rating Services Berhad
Ó Copyright 2018 by RAM Rating Services Berhad
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