MARC has assigned a rating of AAA to Cagamas MBS Berhad’s (Cagamas MBS) asset-backed Fixed Rate Serial Bonds of RM2,060.0 million. The rating is based on the stringent core and portfolio eligibility criteria, aimed at partially mitigating risk of delinquencies and defaults further reinforced by representations and warranties provided by the Federal Government of Malaysia (GOM); deductions of mortgage payments at source; adequate MRTA coverage on all government staff housing loans (GSHLs) in securitised portfolio; overcollateralisation of 140.7%; and the ability of the projected cashflow to withstand AAA default and prepayment stresses.

Cagamas MBS is a limited purpose entity and a wholly-owned subsidiary of Cagamas Berhad (Cagamas), established with principal activities restricted to acquiring government staff housing loans as well as Islamic home financing facilities 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.

The proposed issuance of RM2,060.0 million Nominal Value of Fixed Rate Serial Bonds (CMBS 2005-2) represents the second conventional bonds issuance by Cagamas MBS; the purpose of which is to acquire rights, titles, interests and benefits in, to, under and in respect of selected GSHLs including all charges, guarantees and insurances by way of an equitable assignment. The portfolio of GSHLs (Portfolio 2005-2) amounting to RM2,898.7 million comprises of mortgages of mainly public sector employees as well as pensioners. The GOM’s Housing Loans Division or Bahagian Pinjaman Perumahan (BPP) is the servicer of the securitised pool of GSHLs. The proposed CMBS 2005-2 comprises of seven tranches with maturities on the third, fifth, seventh, tenth, twelfth, fifteenth and twentieth anniversary from the issuance date. The purchase of Portfolio 2005-2 will be undertaken retrospectively i.e. based on portfolio valuation as at the purchase date.

Credit enhancement is provided by the overcollateralisation of 140.7% as Portfolio 2005-2 is sold to Cagamas MBS at a 28.9% discount. From the analysis of the five static pools comprising home financing originated from 1996 to 2000, the mortgages are evidently exposed to technical delinquencies of up to six months primarily due to operational mechanisms in administration of GSHL accounts. Therefore, for purpose of collateral analysis, GSHLs are categorised as defaulted once they are outstanding for more than nine months. The sizing of the proposed bonds is based upon analysis of the default, prepayment and recovery statistics of the five static pools. Historical recovery information in respect of recoveries from 1995 onwards was also utilised. MARC has not incorporated delinquency assumptions in the cashflow as the retrospective purchase has been structured for eight months i.e. up to eight months time lag between collections from public sector employees by BPP and the quarterly payments to be made by BPP to Cagamas MBS. A loss multiple of three times was applied to the base case default rate in the cashflow projections with a loss severity of 95.0% and a recovery time lag of 12 months.

Based on prepayments observed from the static pools higher prepayments were observed for GSHLs with older vintages. Hence, the cashflow has incorporated a prepayment rate that ramps up from 0% to 0.43% on a monthly basis over the first seven years with prepayment build up similar to the average prepayment curve of the static pools and then remaining constant at 0.43% on a monthly basis for the remaining tenure of CMBS 2005-2. Prepayments were stressed with a 50% reduction applied to the base case cash flow.

The transaction benefits from strict portfolio eligibility criteria including, amongst others, residential properties under the GSHL must have certificates of fitness of occupation; the amount of financing under the GSHL has been fully disbursed; the GSHL must have been created more than six months prior to the purchase date; and the GSHL must not be a defaulted account as at the purchase date.

The transaction is a conditional reverse-pay structure with a limited pass-through feature which allows surplus cashflow to be paid to firstly, the outstanding Tranche 7 until its full redemption and then to Tranche 6, should the cash balance exceeds RM90.0 million after the respective scheduled principal repayments on tranches one, two, three, four and five. In the event Tranche 7 is not fully redeemed after the principal repayments of the first five tranches, any excess monies post redemption of Tranche 6 can be applied to Tranche 7. The RM90.0 million to be retained in the cashflow before the pass-through of prepayment is triggered, provides adequate liquidity buffer to allow timely interest payments and redemption of the intermediate tranches.