CapOne Bhd - 2009

MARC has downgraded the ratings of CapOne Berhad’s (CapOne) RM600 million Super Senior Class A-1 and RM250 million Senior Class A-2 bonds to AA+ and B from AAA and BB respectively and affirmed its RM50 million Mezzanine Class B and RM100 million Subordinated bonds at C. Both of the downgraded classes carry a negative outlook. The downgrades reflect the continued credit deterioration of the underlying loan portfolio and three additional obligor defaults, involving a total loan exposure of RM120 million. The negative outlook attached to Super Senior Class A-1 and Senior Class A-2 reflects weakened overcollateralisation and vulnerability of the portfolio to further deterioration in the credit quality of the underlying corporate loans.

CapOne is a bankruptcy remote special-purpose company, established for the purpose of implementing and carrying out the primary collateralised loan obligation (CLO) programme. At closing of the transaction in September 2005, the originator, EON Bank Bhd, transferred its rights, title and interests in a pre-identified RM1,000 million static portfolio of corporate loans to CapOne. The transaction is structured as a true sale of newly-originated corporate loans portfolio from the originator, all of which are five-year non-amortising loans with a single bullet repayment due in September 2010. The proceeds from the issuance of the bonds were utilised to fund the purchase of the portfolio.

During the period under review (February 2009 to December 2009), three more obligors defaulted on missed interest payments, leaving the portfolio with only 19 performing corporate loans belonging to 11 different industry groupings. Of the six defaulters, one obligor has cured the default by meeting the interest due on the loan in six-monthly instalments. MARC has assumed a zero percent recovery rate in analysing the impact of the defaults.   

Over the same period, the credit quality of the portfolio continues to deteriorate following eight more downgrades (excluding the defaults) on the obligors. Of the nine, one obligor was downgraded to CCC+ by MARC in June 2009 due to its failure to service one of its financial obligations, while another one was also downgraded to CCC+ due to loan defaults experienced by one of its main subsidiaries. As of December 11, 2009, based on MARC’s computation which excludes defaulted loans, the portfolio’s weighted average rating factor (WARF) weakened to 23.4% from 7.54% at issue date, reflecting a transition of portfolio credit quality to BBB- from A-. MARC’s cash flow runs using the revised default rates at each rating level indicated that while the Super Senior Class A-1 can still withstand the ‘AAA’ stress level, the bonds are exposed to high likelihood of further loan defaults within the portfolio as 31.6% of the pool are currently rated BBB- and below. The Super Senior Class A-1 is able to withstand further loan defaults of only RM160 million before experiencing principal losses.

As of December 2009, the overcollateralisation level of the loan portfolio comprising  the Super Senior Class A-1, Senior Class A-2 and Mezzanine bonds have deteriorated to 126.7%, 89.4% and 84.4% respectively (February 2009: 140.0%, 98.8% and 93.3%). The latest semi-annual evaluation by the servicer in September 2009 confirmed that the collateral pool has failed the overcollateralisation and weighted average rating factor tests. Under the transaction, a breach of any performance test could trigger early redemption of the Super Senior Class A-1, Senior Class-2 and Mezzanine bonds (in order of loan loss priority). However, the slow build-up currently of the liquidity reserve account to only RM35.2 million is insufficient to trigger early redemption of the senior and mezzanine classes (the minimum required amount is RM45 million).

In light of uncertainties in the global and local economy in the near term, MARC holds the view that obligors shadow-rated below A- will be vulnerable to further negative credit migration. With the portfolio’s exposure to such credits accounting for 60.5% of outstanding performing loans, CapOne bonds are at risk of further downgrade as the likelihood of improvement in the business climate prior to maturity of the bonds in 2010 is low. MARC will continue to monitor the performance of the transaction closely to ensure that our ratings on CapOne remain consistent with available credit enhancement.

Strengths

• Liquidity support provided by a non-amortising liquidity reserve account.

Weaknesses

• Heightened risk of further declines in credit quality and corporate earnings growth of the obligors; and
• No recoveries of principal to date in respect of the six defaulted obligors.