MARC has affirmed its AAA rating on Cagamas MBS Berhad’s (Cagamas MBS) RM2,410.0 million asset-backed fixed rate serial bonds (CMBS 2007-2) with a stable outlook. The bonds programme has an outstanding amount of RM1,140.0 million as at end-August 2016.

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 originated by the Malaysian government. CMBS 2007-2 is backed by a pool of government staff housing loans (GSHL), or Portfolio 2007-2. Repayment risk is low as the periodic obligations of CMBS 2007-2 are met through direct salary or pension deductions monthly.

The affirmed rating is supported by CMBS 2007-2’s strong credit enhancement level of 161.5% as of August 31, 2016 (Quarter 38) with a combined cash at bank and permitted investments of RM766.5 million and outstanding principal of non-defaulted mortgage loans of RM1,074.8 million comprising 45,418 fixed-rate accounts. MARC is of the view that the current credit enhancement level would allow CMBS 2007-2 to withstand any adverse performance of the collateral pool in respect of defaults and prepayments.

Portfolio 2007-2 has continued to demonstrate strong performance as at Quarter 38 with a cumulative default rate (CDR) of 0.53% of the initial pool balance. This is comfortably below MARC’s assumed CDR of 5.01%. Defined as accounts in arrears for more than nine months, the defaults were mainly due to administrative delays in deduction on changes in borrowers’ status and processing time on insurance claims on deceased borrowers. Irregular delinquency rates (accounts in arrears for three months or less) were mainly due to technical issues pertaining to the timing of monthly salary deductions or payment centres updating into the Sistem Pinjaman Perumahan Bersepadu (collection system).

The cumulative prepayment rate on Portfolio 2007-2 rose to 13.59% of the initial pool balance from 12.82% since MARC’s last review. The average quarterly prepayment rate remained stable at 0.36% as at Quarter 38. In the event of high prepayments, the transaction’s structure allows for early redemptions of the back-ended tranches which in turn would reduce concerns on negative carry and asset-liability mismatches.

MARC expects the upcoming redemption of Tranche 4 of RM525.0 million on August 22, 2017 to be met by the current cash and cash equivalents of RM766.5 million as at end-August 2016.

The stable outlook is premised on the rating agency’s expectation 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;
• Low default rates of the collateral pool; and
• Transaction structure provides credit protection.

Challenges/Risks

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