RCE Advance Sdn Bhd - 2007

MARC has reaffirmed the ratings of RCE Advance Sdn Bhd’s (RCEA) RM420.0 million Fixed Rate Medium Term Notes programme (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. The reaffirmed ratings reflect the low defaults and delinquencies of the receivables backing the notes; and ample cash balances in the designated accounts totaling RM98.3 million as of 30 September 2007. Additional credit support to the Facility is provided by RCE Marketing Sdn Bhd’s (RCEM) obligation to ensure that a collateral cover of 1.66 times is maintained for the outstanding bonds throughout the tenure of the Facility. Where defaults and prepayments occur resulting in the collateral cover to dip below 1.66 times, RCEM must either substitute the defaulted or prepaid receivable with a performing receivable or provide funds to restore the collateral cover to the required minimum. The ratings of Class A notes remains two notches above the standalone corporate credit rating of RCEM, a reflection of the level of credit and structural support for the notes which commensurates with its rating level. The rating of Class B notes being one notch above the corporate credit rating of RCEM reflects subordination to Class A notes although still benefiting from the credit support provided by the collateral cover of 1.66 times. The rating of Class C notes remain one notch below the rating of RCEM reflecting the subordination to Class A and B notes in respect of coupon payment and principal repayment. The corporate credit rating of RCEM has been maintained at A-.

RCEA is a special purpose company wholly owned subsidiary of RCEM, incorporated for the purpose of purchasing selected portfolios of identified eligible receivables (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 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.

RCEM assumes the role of servicer under the transaction, administering and monitoring collections from Angkatan Koperasi Kebangsaan Malaysia (ANGKASA). Funds in KOWAJA’s trust account at ANGKASA are directly remitted to RCEA’s master collection account with funds earmarked for coupon payment and principal redemption then transferred to the sinking fund account on a monthly basis. As at 30 September 2007, RM420.0 million MTN remain outstanding backed by six portfolios of IER totaling RM442.1 million and RM98.3 million cash.

During the period under review (December 2006 to September 2007), on average, actual collections exceeded the scheduled collections primarily due to prepayments. The average monthly delinquency and default rates remains low which ranged between 1.6% - 3.1% and 0.2% - 0.4% respectively. However, prepayment rates were found to be higher ranging from 0.8% to 1.1% in comparison to the previous review of 0.3% to 0.7%. This may be attributed to the competitive personal loan financing market and the salary increases of government servants which allow for larger financing amounts. As at 30 September 2007, the cash balances in each designated accounts for all the tranches, with exception to Tranche F, are all more than sufficient to meet the first principal redemptions of Class A notes for the said tranches (dates for first principal redemptions ranging from December 2008 to November 2009).

RCEM’s creditworthiness remains a key rating driver for the rated bonds on account of its contractual obligation to substitute prepaid and defaulted IER with performing IER. The transaction relies on RCEM’s ability to generate new receivables for the purpose of substitution, and to a lesser extent, on its undertaking to top up any shortfall in the sinking fund account as well as a corporate guarantee from RCE Capital Berhad.

RCEM is principally involved in the provision of personal loans to cooperative members and the hire purchase of electrical home appliances and other consumer durable products. In FY07, RCEM recorded a significant 75.0% (FY06: 58.5%) revenue growth on the back of a growing portfolio of consumer receivables and improvement in its operating margin to 56.6% (FY06: 38.9%). Although gearing improved to 2.7 times in 1Q08, RCEM’s gearing is likely to rise again on account of credit facilities assumed for the purposes of securitization. RCEM’s proforma debt equity ratio will rise to 3.85x assuming full drawdown of the facilities, based on its shareholders’ funds as at March 31st, 2007.