MARC has downgraded the long-term ratings of Aegis One Bhd’s (Aegis One) RM900.0 million senior secured bonds and RM100.0 million subordinated secured bonds from AAA and BB to AA and B respectively. The downgrades are premised on the decline in the weighted average rating of Aegis One’s portfolio of corporate loans to BBB/BBB- from A-/BBB+ following the default of two obligors in the portfolio and the ability of the portfolio to currently withstand AA stress as opposed to AAA stress scenario previously. Nevertheless, the senior bonds benefit from overcollateralization and interest coverage ratios; adequate supervision of the corporate loans by the portfolio manager; and, liquidity reserve which covers more than three months interest coverage.

Aegis One is a bankruptcy remote special-purpose company incorporated in Malaysia, established for the primary purpose of undertaking this primary collateralized loan obligation (CLO) programme. Upon closing in November 2002, Affin Bank Bhd (Affin Bank) as the originator transferred its rights, title and interest in, to and under a pre-identified portfolio of corporate loans to Aegis One. The transaction is structured as a true sale of the corporate loans portfolio from the originator.

Since transaction closing, Aegis One’s portfolio of 25 underlying securitized corporate loans with total exposure of RM1,000.0 million, experienced a total of nine upgrades and fourteen downgrades over the past three and a half years.

During the six months period since the last review, the portfolio exposure to credits rated BBB (lowest rating allowable) remained at four obligors representing 14.0% of total portfolio. However, two obligors which were downgraded to BBB- in December 2005 have been downgraded further to D following their failure to pay interest on the interest payment date on 25 May 2006. With four downgrades, two of which were from BBB- to D, the portfolio’s weighted average rating deteriorated to 16.42 from 8.99 in December 2005. The significant increase in weighted average rating factor is due to the rating migration at the lower end of the credit scale as MARC’s weight factors are negatively skewed by design i.e. higher increase in weight factors as the credit quality decreases. The portfolio’s exposure to credits rated A- and above represented 56.5% (Dec 2005: 60.5%) of the total portfolio.

The two obligors which defaulted on their interest payment belong to the farming & agriculture and clothing/textile industries. MARC was made to understand that Aegis has commenced legal action for recovery of the defaulted loans.

As at end May 2006, Aegis One’s overcollateralization (OC) ratio remained at 111.11%, above the required minimum of 105.00%. The interest coverage (IC) ratio as of the same date decreased to 172.00% from end November 2005’s 198.06%, although higher than the required minimum of 120.00%. The liquidity reserve account increased to RM17.5 million from RM11.7 million previously, following the accumulation of excess of interest collections over senior expenses and coupon on the senior bonds; effectively providing more than three months interest coverage on the senior bonds. Due to the two loan defaults and assuming zero recoveries, MARC anticipates that as at the next calculation date in November 2006, the OC ratio will amount to 100.01% which is below the minimum requirement thus potentially resulting in partial early redemption on the senior bonds funded by available excess spread. Barring any significant deterioration of other obligors, the progressive early redemptions of the senior bonds on each interest payment date will increase the level of subordination prior to the final legal maturity in November 2007.