The rating assigned to SBSB’s MMTN reflects the holding company’s, Koperasi Shamelin Berhad’s (KSB) satisfactory asset quality arising from the collection arrangement with ANGKASA (Angkatan Koperasi Kebangsaan Malaysia Berhad) and stringent eligibility requirement for financing; low level of job transfers and resignations in the public sector; as well as a protective debt issue structure. A moderating factor to the rating is the risk profile of the consumer-related industry characterized by stiff competition and vulnerability to economic cycles.

SBSB, a wholly owned subsidiary of KSB involved in trading of teakwood furniture, will be the issuing vehicle. Proceeds from the issuance of Murabahah Notes under the MMTN will be mainly on-lent to KSB for the purpose of refinancing its existing borrowings and generating new consumer financing. As KSB’s operations will form the source of redemption of the Murabahah Notes, the focus of MARC’s credit risk analysis is on KSB.

Established under the Co-operative Societies Act 1993, KSB is mainly involved in extending consumer financing to its members drawn from the civil service, for a wide range of consumer products including furniture, electrical appliances and other household products. Repayment of the fixed rate financing is effected via monthly deductions of the consumers’ salaries; the collection of which is arranged through ANGKASA. KSB’s loan portfolio quality is relatively good, based upon the low level of delinquency in the public sector accounts, arising mainly from job transfers and resignations. Financing growth, however, has been constrained by the limited funds available to KSB: revenue in FY2002 increased marginally by 4.4% to RM2.2 million (from consumer financing and hibah). With the enlarged funding base following the issuance of the Murabahah Notes under the MMTN, KSB expects to expand its financing portfolio significantly through the appointment of more suppliers. Demand for consumer financing, nevertheless, is dependent on the economic conditions and consumers’ income levels, set against an intensely competitive industry.

Liquidity risk is mitigated under the issue structure through the serial redemption of the Murabahah Notes; the availability of funds in the Trading Profit Account (capturing trading profits arising from goods/services rendered to the government servants) to meet the payment obligations under the MMTN in the event of insufficient funds in the Collection Account; liquidity support provided by the Finance Service Reserve Account (FSRA) amounting to a minimum of 12 months secondary notes obligations; and the two-year build up of funds in the Sinking Fund Account (SFA) prior to the primary notes redemption date of each tranche.

The issue structure stipulates that SBSB shall not incur additional indebtedness via external borrowings save and except for the proposed MMTN and inter-company financing, without prior written consent of the Trustee. In addition, KSB has provided an undertaking that it shall inject additional equity or extend inter-company financing to SBSB in the event that SBSB has negative shareholders’ funds.