CapOne Bhd - 2007

MARC has reaffirmed the ratings of CapOne Bhd’s (CapOne) RM600.0 million super senior class A-1 bonds  and RM250.0 million senior class A-2 bonds at AAA; RM50.0 million mezzanine 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. Despite the decline in collateral performance, the affirmed ratings of the super senior, senior and mezzanine bonds continue to be consistent with the credit enhancement available for each respective class.

CapOne 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 - EON Bank Bhd transferred its rights, title and interests in a pre-identified RM1,000.0 million static portfolio of corporate loans to CapOne. 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.

To date, the underlying portfolio consists of 23 performing corporate loans from 12 different industry groupings, all of which are five-year non-amortizing loans with a single bullet repayment. Excluding two defaulted loans, the portfolio weighted average rating (WAR) in respect of the remaining 23 obligors is at A-/BBB+. There have been no recoveries 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 to assess the ability of the super senior, senior and mezzanine bonds to withstand revised default rates on the remaining RM930.0 million loan portfolio at their respective rating levels.

Since MARC’s previous rating review of October (2006), the portfolio experienced 4 downgrades, one of which was downgraded to D on account of payment default. The obligor which was downgraded to D belongs to the telecommunication industry. The downgrades of the three obligors were attributed to deteriorating financial performance, diversification into non-core businesses which increased the risk profile of two obligors; and higher debt leverage. Following the ratings migration, obligors rated A- and above as a percentage of the portfolio (in value terms) declined to 48.0% as at end September 2007 (September 2006: 51.0%).

As at 18 September 2007, the overcollateralization (OC) ratios were 155.0%, 104.1% and 98.3% (per servicer’s computation) for the super senior, senior and mezzanine bonds respectively. Due to the delay in interest payment by one obligor, the OC ratios for the senior and mezzanine bonds were below their required minimum levels of 105.0% and 102.0% respectively. Failure of the OC tests resulted in the diversion of all excess spread to the liquidity reserve account, which has grown to RM28.4 million as of 27 September 2007 (per servicer confirmation) as compared to RM16.6 million as of 20 September 2006. Nevertheless, the OC ratios for the senior and mezzanine bonds were restored to 109.4% and 103.3% respectively, following full interest payment by the same obligor on 21 September 2007. CapOne’s interest coverage (IC) ratios as at 18 September 2007 stood at 272.6%, 202.6% and 190.7% for super senior, senior and mezzanine bonds respectively were well above the minimum required level of 120%. MARC expects the cash in the liquidity reserve account, currently at RM28.4 million, acts as a liquidity buffer to meet potential shortfall in interest payments, to be funded by semi-annual excess spread to RM45.0 million by December 2008 in the absence of further defaults in the portfolio. Thereafter, excess cash flows will be directed towards redeeming the super senior bonds ahead of final legal maturity.