MARC has assigned a rating of AAA to Cagamas MBS Berhad’s (Cagamas MBS) RM1,555.0 million secured fixed-rate serial bonds. The rating is based on the stringent core and portfolio eligibility criteria of the securitized mortgages, comprising mortgages of government pensioners only, aimed at mitigating risk of delinquencies and defaults further reinforced by the representation and warranty provided by the Originator, the Federal Government of Malaysia (GOM); deductions of mortgage payments at source; centralised pension deductions administered by Jabatan Perkhidmatan Awam (JPA) and Ministry of Defence (MINDEF); acquisition of portfolio at a discount of 20.8% based on its portfolio valuation as at the purchase date; and ability of the projected cash flow to withstand default and prepayment stresses.

Cagamas MBS is a limited purpose entity and a newly incorporated wholly-owned subsidiary of Cagamas Berhad (Cagamas), established with principal activities restricted to acquiring conventional housing loans or Islamic home financing from the GOM, and issuing asset-backed securities or any other forms of securities for the purpose of acquiring the housing loans/home financing thereof.

On closing, the GOM as Originator, will assign its rights, title, benefit and interest in, to, under and in respect of a portfolio of mortgage assets with an outstanding principal balance of RM1,935.7 million, by way of absolute equitable assignment, to Cagamas MBS. Core eligibility criteria include first ranking security on the subject property; Government Staff Housing Loan (GSHL) must have been created for more than six months prior to the purchase contract date and it has been fully disbursed. With regards to the pensioners portfolio to be securitized, the eligibility criteria require the pension payments to have commenced and that JPA and MINDEF, prior to the purchase contract date, had received and acted on the instructions to deduct and make payment of the monthly instalment to the Originator; it has not been classified by the Originator as being currently in default and that each GSHL includes residential unit insurance and mortgage reducing term assurance (MRTA) policy cover.

The GOM’s Housing Loans Division or Bahagian Pinjaman Perumahan (BPP) will act as the Servicer of the securitized pool of mortgage assets. To fund the purchase, Cagamas MBS will issue RM1,555.0 million fixed-rate serial bonds comprising four series with maturities on the third, fifth, seventh and tenth anniversary from the issuance date. The purchase will be undertaken retrospectively, whereby the pool of mortgage assets is acquired based on its portfolio valuation as at 29th February 2004. The monthly collections by BPP will be channelled to Cagamas MBS on a quarterly basis.

Although the core and portfolio eligibility criteria substantially mitigate risks of delinquency and default with the aim of selecting performing GSHLs of government pensioners, the portfolio is exposed to potential defaults arising from loss of pension payment owing to bankruptcy and imprisonment; mode of pension payment; and pensioners returning to service. Relative to the total pool of pensioners’ GSHL deductions, the GSHL deductions from bankrupt and imprisoned pensioners are negligible at 0.05% and 0.008%, respectively. Although MARC has stressed the proxy for default of 0.05% by 20 times, the stressed default rate is a mere 1%.

In respect of pensioners, the dynamic data available indicated that the bulk of prepayments by pensioners are largely involuntary i.e. due to deaths with an average six-year prepayment rate of 0.21%. MARC has stress tested the cash flow for prepayment rates of 0% to 2% with annual growth in prepayments of 1%.

As the weighted average yield on the GSHLs of 4.0% is lower than the weighted average coupon on the bonds, the negative spread will be funded by the principal cash flow stream from the mortgage assets. The transaction is a conditional reverse-pay structure with a limited pass-through feature which allows surplus cashflow to be paid to the outstanding bonds with the longest maturity i.e. series four bonds maturing in year ten, if the cash balance exceeds RM66 million after the respective scheduled principal repayments on series one, two and three bonds. The RM66 million to be retained in the cashflow, before pass-through of prepayments are triggered, provides adequate liquidity buffer to allow timely interest payments and redemption of the intermediate tranches.