MARC has affirmed its rating of AAA_IS on Cagamas MBS Berhad’s (Cagamas MBS) RM2,110.0 million asset-backed Sukuk Musyarakah issuance (CMBS 2007-1-i) with a stable outlook. The sukuk programme has an outstanding amount of RM1,255.0 million as at end-October 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 2007-1-i is backed by a pool of government staff Islamic home financing (GSIHF), or Portfolio 2007-1-i. Repayment risk is low as the periodic obligations of CMBS 2007-1-i are met through direct salary or pension deductions monthly.

The affirmed rating is premised on CMBS 2007-1-i’s strong credit enhancement level of 144.3% as of October 31, 2016 (Quarter 39) with a combined cash at bank and permitted investments of RM464.0 million and outstanding principal of non-defaulted home financing of RM1,347.1 million comprising 21,634 fixed-rate accounts. MARC is of the view that the current credit enhancement level would allow CMBS 2007-1-i to withstand any adverse performance of the collateral pool in respect of defaults and prepayments.

The performance of Portfolio 2007-1-i remains satisfactory as at Quarter 39 with a cumulative default rate (CDR) of 0.61% of the initial pool balance, which remains well below MARC’s projected CDR of 5.10%. Defined as accounts in arrears exceeding nine months, the defaults were mainly due to administrative delays in deduction on changes in customers’ status and processing time on takaful claims on deceased customers. 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).

Portfolio 2007-1-i’s cumulative prepayment rate was 10.30% as at Quarter 39, while the average quarterly prepayment rate for the current review period remained stable at 0.26% (Quarter 36: 9.58%; 0.27%). MARC notes that in the unexpected event of 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 Cagamas MBS to early redeem the sukuk in reverse order with the last tranche being paid first. This is, however, subject to the availability of at least RM90.0 million in the CMBS 2007-1-i’s collection account post-redemption. MARC also notes that Portfolio 2007-1-i’s weighted average term to maturity of 12.0 years against the remaining term to maturity of 10.3 years of CMBS 2007-1-i further reduces the risk of an asset-liability mismatch. 

MARC expects the upcoming redemption of Tranche 4 of RM400.0 million on May 29, 2017 to be met by the current cash and cash equivalents of RM464.0 million as at end-October 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;
•      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.