Kerisma Bhd - 2007

MARC has reaffirmed the rating of Kerisma Bhd’s (Kerisma) RM870.0 million senior secured bonds at AAA; affirmed the RM30.0 million mezzanine secured bonds at AA- and downgraded the rating of the RM100.0 million subordinated secured bonds to B from BB- respectively. The lowered rating on the subordinated bonds reflects a new obligor default and further deterioration in the collateral pool since the last rating action. According to the most recent servicer report (31 May 2007), the overcollateralization (OC) ratio for the senior bonds was 100.0%, below the minimum requirement of 105.0%. At the same time, the mezzanine bonds’ OC ratio was 96.7%, below its minimum requirement of 104.0%. Failure of the OC tests resulted in the diversion of all excess spread to the liquidity reserve account, which has grown to RM31.5 million versus RM26.1 million at the time of the last rating action. MARC is of the view that the ratings of AAA and AA- still commensurate with the level of credit enhancement currently available, following its review of the results of the new cash flow runs generated on the performing RM915.0 million of the loan portfolio. The OC has since restored to 105.2% and 101.7% following an interest payment made by an obligor after 31 May 2007.

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. At closing of the transaction, the originator - Alliance Merchant Bank Bhd (Alliance Merchant) transfered its rights, title and interests in a pre-identified RM1,000.0 million static portfolio of corporate loans to Kerisma. The transaction is structured as a true sale of newly-originated corporate loans portfolio from the originator. The proceeds from the issuance of the bonds were utilised to fund the purchase of the portfolio.
The underlying portfolio consists of 23 performing corporate loans from 16 different industry categories, all of which are five-year non-amortizing with a single bullet repayment. Excluding two defaulted loans which will not be contributing cashflows to the transaction going forward apart from potential recoveries (if any), the portfolio weighted average rating (WAR) in respect of the remaining 23 obligors is at A-/BBB+. There has been zero recovery to date, well below MARC’s stressed recovery assumption of 20% with a 2-year time lag. Given the WAR of A-/BBB+, MARC ran a series of stress tests at each rating level to assess the ability of the senior and mezzanine bonds to withstand revised default rates employed on the remaining RM915.0 million loan portfolio.

During the current review, the portfolio experienced 4 downgrades, one of which was downgraded to D; and two upgrades. The loan borrower which was downgraded to D belongs to the transportation industry. The downgrades of three obligors were attributed to deteriorating credit quality due to tougher operating environment, pursuit of risky diversifications and over expansion of business activities resulting in strain on liquidity. Following the rating migration, portfolio composition of obligors rated A- and above declined to 49.0% as at end June 2007 (June 2006: 52.0%)