CAGAMAS MBS BERHAD (CMBS 2005-1) - 2016

MARC has affirmed the AAA_ID rating on Cagamas MBS Berhad’s (Cagamas MBS) RM2,050.0 million asset-backed Sukuk Musyarakah issuance (CMBS 2005-1) with a stable outlook. The rating action affects the outstanding RM810.0 million sukuk issued under CMBS 2005-1.

The key rating factor is CMBS 2005-1’s strong credit enhancement level of 217.5% as of September 30, 2015 (Quarter 42) on the back of the transaction’s Collections Account (CA) balance of RM421.8 million and outstanding principal of non-defaulted home financings of RM1,339.8 million comprising 29,771 fixed-rate home financings. MARC is of the view that the current credit enhancement level would allow CMBS 2005-1 to withstand any adverse performance of the collateral pool in respect of defaults and prepayments.

Cagamas MBS is a wholly-owned special purpose vehicle of Cagamas Holdings Berhad and was established to undertake the securitisation of conventional and Islamic home financing (Portfolio 2005-1) originated by the Malaysian government. The periodic obligations of CMBS 2005-1 are met by monthly instalments from a pool of government staff Islamic home financings (GSIHF) through direct salary or pension deductions.

The performance of Portfolio 2005-1 remains satisfactory as at Quarter 42 with a cumulative default rate (CDR) of 0.77% of the initial pool balance, which remains well below MARC’s projected CDR of 3.50%. Defined as accounts in arrears exceeding nine months, the defaults were largely due to administrative and technical delays arising from pending claims on mortgage reducing term takaful and confirmation of borrowers’ status after the cessation of home financing instalments.

The delinquency rate (accounts in arrears for three months or less) of the collateral pool during the current review period (October 1, 2014 – September 30, 2015) has been volatile, ranging between 3.80% and 10.62% as at Quarter 42, although it has declined from 11.39% as at Quarter 38 (September 30, 2014). The high delinquency rate was attributed to data reconciliation lag as a result of migration to Lembaga Pembiayaan Perumahan Sektor Awam’s (LPPSA) new mortgage payment and recording system. Following the passing of the Public Sector Home Financing Board Act 2015, Bahagian Pinjaman Perumahan (BPP) has been replaced by LPPSA which is also under the Ministry of Finance, as the servicer of Portfolio 2005-1 from January 1, 2016. MARC notes that there were no changes in the servicer’s operations as LPPSA has largely retained BPP’s existing resources and system. Nevertheless, LPPSA’s performance will be closely monitored for any changes to Cagamas MBS’ servicer risk.

Portfolio 2005-1’s cumulative prepayment rate was 12.81% as at Quarter 42, while the average quarterly prepayment rate for the current review period remained stable at 0.31% (Quarter 38: 11.61%; 0.31%). MARC notes that in the event of an unexpectedly high volume of prepayments, the risk of a negative carry position will be mitigated by the transaction’s conditional pass-through provision feature which allows partial early redemption of CMBS 2005-1’s Tranche 6 which matures in August 2020. This is, however, subject to the availability of at least RM66.0 million in the CA post-redemption. MARC also notes that Portfolio 2005-1’s longer weighted average term to maturity of 10.5 years against the remaining term to maturity of 4.5 years of CMBS 2005-1’s longest tranche further reduces the risk of an asset-liability mismatch.

MARC expects CMBS 2005-1 to be able to comfortably meet the upcoming redemption of Tranche 5 of RM410.0 million on August 8, 2017 as the current cash balance of RM421.8 million is already sufficient, with six quarters remaining.

The stable outlook is premised on MARC’s expectations of continued stable collateral performance and a sustained high credit enhancement level that remains supportive of the rating.

Major Rating Factors

Strengths

• Substantial credit enhancement in the form of high overcollateralisation;
• Satisfactory performance by the collateral pool; and
• Well-managed collateral servicing and transaction administration.

Challenges/Risks

• Reinvestment risk associated with prepaid home financing; and
• Risk of negative carry from higher-than-expected prepayments.