Cagamas MBS Bhd - 2007

MARC has assigned a rating of AAA to Cagamas MBS Berhad’s (Cagamas MBS) asset-backed Fixed Rate Serial Bonds of RM2,410.0 million. The rating reflects the quality of the underlying government staff housing loans (GSHLs); overcollateralisation of 125.1% which allows the transaction to withstand AAA default and prepayment stresses; and the strong transaction administrator, Cagamas Berhad (Cagamas).

Cagamas MBS is a limited purpose entity and a wholly-owned subsidiary of Cagamas, whose principal activities are restricted to acquiring GSHLs, originated under both Islamic and conventional principles, from the Federal Government of Malaysia (GOM), and issuing securities for the purpose of acquiring the GSHLs thereof. Cagamas MBS and Cagamas are expected to become wholly owned subsidiaries of a newly incorporated holding company, Cagamas Holdings Berhad, upon completion of an ongoing restructuring exercise which MARC views as neutral to the credit quality of Cagamas MBS. The issuance of the RM2,410.0 million nominal value asset-backed Fixed Rate Serial Bonds (CMBS 2007-2) represents the fifth issuance by Cagamas MBS, the proceeds of which will be mainly used for the acquisition of rights, title, interest and benefits in respect of portfolio of eligible GSHLs (Portfolio 2007-2) amounting to RM3,016.0 million comprising mortgages of mainly public sector employees. Portfolio 2007-2 comprised relatively older vintage GSHLs with weighted average seasoning of 7.6 years as compared to Portfolio 2005-1, Portfolio 2005-2 and Portfolio 2007-1-i. The GOM’s Housing Loans Division or Bahagian Pinjaman Perumahan (BPP) is the servicer of the securitized portfolio. The proposed CMBS 2007-2 comprises seven tranches with maturities on the third, fifth, seventh, tenth, twelfth, fifteenth and twentieth anniversary from the issuance date. Similar to the previous transactions, the purchase will be undertaken retrospectively, whereby the pool of GSHLs is acquired based on portfolio valuation as at 28 February 2007.

Credit enhancement is provided primarily by the overcollateralisation of 125.1%. The sizing of CMBS 2007-2 is based upon analysis of the default, delinquency and prepayment statistics derived from five static pools with seven-year rundown data. Historical recovery information in respect of recoveries from 1995 onwards were also utilised. A cumulative default rate of 8.19% was used as base case default rate for the 20-year period on the assumption that the default experience will be similar to the average 10^th month loss curve up to the 88^th month, after which it will remain constant at 0.03% on a monthly basis up to the end of year 15 before falling to 0.02% thereafter. In stressing defaults, a loss multiple of three times was applied. MARC has also assumed a loss severity of 95.0% and a recovery time lag of 24 months.

Based on prepayments observed from the static pools, higher prepayments were registered for GSHLs with older vintages. Hence, the cashflow has incorporated monthly prepayment rates that ramp up from 0.0% to 0.25% over the twenty-year period of CMBS 2007-2. Prepayments were stressed under both high and low prepayment scenarios with 50% reduction and 100% increase in prepayment rates being applied to the base case.
The quality of the collateral is underpinned by strict portfolio eligibility criteria including, amongst others, properties under the GSHLs must have certificate of fitness of occupation; the amount of financing under the respective GSHLs have been fully disbursed; the GSHLs must have been created more than six months prior to the purchase date; and, the GSHLs must not be defaulted accounts as at the purchase date. In the event of a breach of the representations in relation to the portfolio eligibility criteria, the GOM as the originator will undertake to compensate Cagamas MBS in the form of equivalent amount or other GSHLs acceptable to Cagamas MBS. All GSHLs possess adequate mortgage reducing term assurance (MRTA) coverage. Further, mortgage payments are deducted at source.

The transaction is a conditional reverse-pay structure with a limited pass-through which allows surplus cashflow on the scheduled maturity dates of Tranches 1, 2, 3, 4, and 5 to be paid to firstly, the outstanding Tranche 7 until its full redemption and then to Tranche 6, provided that the cash balance in the Collections Account 2007-2 exceeds RM90.0 million after any principal redemption of Tranche 7 and/or Tranche 6. The RM90.0 million to be retained in the Collections Account after the pass-through of prepayment is triggered, provides adequate liquidity support for the timely payment of coupons and redemption of the intermediate tranches.