MARC has affirmed the ratings of RCE Advance Sdn Bhd’s (RCEA) RM420.0 million Fixed Rate Medium Term Notes programme (referred to as the Facility) at A+ for RM240.0 million Class A; A for RM120.0 million Class B; and BBB+ for RM60.0 million Class C notes with stable outlook. The affirmation is a reflection of at least 1.66 times collateral backing Class A and B notes which is maintained at all times; provision for substitution of defaulted receivables and/or early settlement with identified eligible receivables (IER) by RCE Marketing Sdn Bhd (RCEM), the originator under the transaction; adequate cashflow protection during the tenure of the Facility; and low job transfers and resignations in the public sector. Nonetheless, the ratings are, however, moderated by the historically high debt leverage position resulting from rapid expansion of RCEM’s financing business through external funding. In addition, the increasing competitive outlook in the personal loan financing industry may place downward pressure in the profit margins of RCEM Group.

RCEA is a special purpose company and a wholly owned subsidiary of RCEM, incorporated for the purpose of purchasing selected portfolios of IER from RCEM. The IER comprising of scheduled repayments (principal plus interest) of personal loan financing disbursed to government servants who are members of Koperasi Wawasan Pekerja-Perkerja Berhad (KOWAJA) form the source of repayment for the Facility. The Facility comprises of Class A, B and C notes with six tranches of RM70.0 million each. RCEM is required to secure IER worth RM100.0 million prior to the drawdown of each tranche. During the period under review (December 2005 to November 2006), five tranches were drawndown totaling RM300.0 million of Class A and B notes for the purchase of five portfolios of IER totaling RM500.2 million. In terms of priority, holders of Class B and C notes rank second and last respectively against Class A notes. The sale of the various portfolios of IER from time to time, is by way of absolute legal assignment of all of RCEM’s rights, title and interest in, to and under the IER.

Under the transaction, the servicer function is undertaken by RCEM with the primary responsibility of administering and monitoring collections from Angkatan Koperasi Kebangsaan Malaysia (ANGKASA). As at November 2006, the total outstanding IER of RM440.7 million and the balance in the designated accounts of RM49.0 million formed the collateral backing RM300.0 million of outstanding Class A and B notes. MARC observed that on average, actual collections exceeded the scheduled collections primarily due to prepayment and the timing difference in payments received from ANGKASA resulting in double deductions in certain months. The average monthly delinquency, default and prepayment rates remains low which ranged between 0.6% - 3.0%; 0.0% - 0.3%; and 0.3% - 0.7% respectively. MARC observes that the delinquent IER were mainly technical in nature brought about by the time lag between the first instalment payment and the date the loan is disbursed which could extend up to four months. Prepayments were mainly driven by the competitive personal loan financing market where comparatively lower interest rates on loans and longer loan tenures are offered.

Credit risk under the transaction partly hinges on the financial standing of RCEM as credit support is provided for defaults and prepayments by way of substitution of defaulted and prepaid IER with performing IER. Therefore, RCEM’s ability to generate new receivables to be made available for substitution is critical to this transaction. Nevertheless, the noteholders benefit from the undertaking by RCEM and RCE Capital Berhad (RCEB) to top up any shortfall in the sinking fund account as well as a corporate guarantee from RCEB. Liquidity is satisfactory given the collateral backing of Class A and B notes and maintenance of next six months coupon in the debt service reserve account. As at end November 2006, balance in the designated accounts amounted to RM49.0 million, sufficient to cover RCEA’s coupon payments up to the next two years for some of the issued tranches.

The principal activities of RCEM are provision of personal loans to members of cooperatives and that of trading in electrical home appliances and other consumer durable products mainly on hire purchase terms. RCEM is a wholly owned subsidiary of RCEB. RCEM’s debt leverage as at 31st October 2006 stood at 2.8 times and is expected to remain high following further issuances under the Facility. Barring any deterioration in asset quality of the various portfolios of IER beyond MARC’s expectation; and, unfavourable conditions in the personal loan financing market which may restrict RCEM’s ability to generate new receivables for substitution, the rating outlook remains stable.