MARC has assigned ratings of AAA, AA and BB to Kerisma Bhd’s (Kerisma) RM870.0 million senior secured fixed-rate, RM30.0 million mezzanine 5-year secured fixed-rate and RM100.0 million subordinated secured variable-rate asset-backed bonds. The ratings are based on the total credit enhancement of 16.4% and 12.6% for the senior and mezzanine bonds respectively, the A- weighted average rating of the underlying corporate loans portfolio, the performance tests in place to divert cash flow upon occurence of trigger events and the establishment of a non-amortizing liquidity reserve equivalent to half coupon of the senior and mezzanine bonds that will be partially pre-funded and partially build-up from the excess spread. MARC has also considered the capability of the portfolio manager, Public Bank Bhd, to monitor the performance of the corporate loans portfolio.

Kerisma is a bankruptcy remote special-purpose company incorporated in Malaysia, established for the purpose of implementing and carrying out this primary collateralized loan obligation (CLO) programme. Upon closing, Alliance Merchant Bank Bhd (Alliance Merchant) as the originator, will transfer its rights, title and interest in, to and under a pre-identified RM1,000.0 million static portfolio of corporate loans to Kerisma. The transaction is structured as a true sale of the corporate loans portfolio from the originator. As this is a primary CLO, none of the corporate loans in the pre-identified portfolio were direct transfers from Alliance Merchant’s books. To fund the purchase, Kerisma will simultaneously issue the asset-backed bonds of RM870.0 million senior secured, RM30.0 million mezzanine secured and RM100.0 million subordinated secured bonds.
The underlying portfolio of corporate loans analyzed by MARC consists of 25 individual obligors from 16 different industry categories with a weighted average rating of A-. The highest industry concentration comes from the construction and engineering category and represents 17.0% of the total portfolio of RM1,000.0 million. In terms of rating distribution, 66.0% of the portfolio is exposed to obligors rated A- and above. Upon closing, substitution of corporate loans is allowed only in very limited circumstances, i.e. where there is a mandatory prepayment or credit impairment event. Otherwise, the portfolio will remain effectively static post-closing.

In sizing the total credit enhancement, MARC subjected the structure to different default timing and interest rate stress testing, consistent with a AAA rating and AA rating stress level respectively. The senior bonds are supported by overcollateralization of 14.9% and liquidity reserve of 1.5%. The mezzanine bonds are supported by overcollateralization of 11.1% and liquidity reserve of 1.4%. While the liquidity reserve is expected to build-up to 1.5% within the first year on closing, further build-up to pre-designated amounts is required if defaults on the corporate loans were to occur.

MARC’s rating methodology for collateralized debt obligations (CDO) is available on our website, www.marc.com.my.