ABS Samudera Receivables Bhd - 2008

MARC has affirmed the AAA rating on ABS Samudera Receivables Berhad’s (ASRB) RM25.0 million Notes Series-A under its RM250.0 million Medium Term Notes (MTN) Programme. The affirmation reflects the satisfactory performance of the underlying consumer receivables pool and the sufficient level of credit enhancement provided by excess spread and liquidity reserves available to support the AAA-rating despite significantly higher than expected cumulative default and prepayment rates. The receivables portfolio comprises consumer loans to public sector employees originated by Koperasi Shamelin Berhad (KSB), serviced through salary deductions at source administered by Angkatan Koperasi Kebangsaan Malaysia Berhad (Angkasa).

ASRB is a bankruptcy remote special purpose vehicle incorporated for the sole purpose of issuing up to RM250 million MTN to purchase eligible consumer financing receivables (Receivables) from time to time from KSB. The purchase of Receivables is initially funded via a revolving credit facility from Deutsche Bank (Malaysia) Berhad (Deutsche Bank). ASRB in turn, refinances the liquidity facility by issuing a series of notes under the MTN programme, with each series secured by a corresponding portfolio of Receivables. The sale of the Receivables is by way of true sale via equitable absolute assignment.

At closing, ASRB issued RM25.0 million Notes Series-A backed by a pool of Receivables with an outstanding loan amount of RM25.0 million (Portfolio-A). Notes Series-A comprised five tranches of RM5 million, each with tenures of one to eight years. The first tranche was redeemed on April 25, 2008. As at August 31, 2008, Portfolio-A comprised Receivables with a weighted average term to maturity of approximately 54 months and weighted average interest rate of 14.4%.

During the period under review (April 2007 – August 2008), Portfolio-A experienced higher than expected cumulative default and prepayment rates of 1.93% and 35.0%, respectively. MARC notes, however, that the default and prepayment rates remain within the AAA-rating stress scenarios. As at August 31, 2008, the entire principal portion of defaulted receivables has been sufficiently covered by the excess spread.  Nevertheless continued high prepayments may impact the size of the excess spread, the extent of which is moderated by the penalty derived from the rule 78 computation imposed on prepayments. The requirement under the transaction for any available excess spread to provide for the principal portion of defaulted receivables provides additional liquidity support for defaults.   

Credit enhancement under Notes Series-A is provided by the sizable excess spread and a liquidity reserve balance which has been built up to 12.5% of the nominal amount of Portfolio-A or RM3.1 million as at August 31, 2008. The transaction is insulated from basis risk as both the interest rates on the collateral and the notes are fixed. Although salary deductions are first deposited into KSB’s trust account prior to remittance into ASRB’s collection account, commingling risk is addressed by the electronic tagging of the salary deductions for easy identification. In addition, KSB’s trust account and ASRB’s designated accounts are held at financial institutions with AA/MARC-1 or equivalent ratings, further alleviating commingling risk.

KSB is established under the Co-operative Societies Act 1993 and its main source of revenue is derived from consumer financing offered to eligible members comprising mainly civil servants. The quality of KSB’s loan portfolio has been relatively good historically based upon the low level of defaults in the public sector accounts.

Strengths

• Historically low level of defaults in consumer financing receivables of public sector employees;
• Sizeable excess spread which has resulted in a significant build-up in the liquidity reserve; and
• Structural protections in the transaction to address commingling risk.

Challenges

• High prepayments experienced early in the transaction significantly exceeds original rating assumptions; and
• Administrative delays and time lags in salary deductions leading to delinquencies.