CREDIT ANALYSIS REPORT

Kerisma Bhd - 2008

Report ID 2805 Popularity 1736 views 72 downloads 
Report Date Feb 2008 Product  
Company / Issuer Kerisma Bhd Sector Primary CLO
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Rationale

MARC has downgraded the ratings of Kerisma Bhd’s (Kerisma) RM870.0 million senior secured bonds, RM30.0 million mezzanine secured bonds and RM100.0 million subordinated secured bonds from AAA, AA and B to AA-, A- and C, respectively. The downgrades are premised on further deterioration in the underlying loan portfolio resulting from a new obligor default and erosion of credit enhancement levels for the senior and mezzanine secured bonds. Following the recent default, all excess spread has been diverted to the liquidity reserve account which stood at RM39.2 million as of January 2008. The credit enhancement for the senior and mezzanine secured bonds has declined to 4.5% and 1.0% (July 2007: 8.8% and 5.2%), respectively.

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 transaction close, the originator, Alliance Investment Bank Bhd (Alliance Investment) 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 a 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.

Since transaction close, the underlying loan portfolio of 25 corporate loans experienced a total of five upgrades and eleven downgrades. During the six months period since the last review, the portfolio experienced two downgrades, one of which was downgraded to D. The obligor which was downgraded to D belongs to the automotive industry. The downgrade of the other obligor was attributable to its higher business risk profile on account of diversification.  Despite the rating migration, underlying portfolio’s exposure to credits rated A- and above remains unchanged at 43.0% of the total portfolio.

As of January 2008, the underlying portfolio consists of 22 performing corporate loans from 15 different industries, all of which are five-year non-amortizing with a single bullet repayment. Excluding the three defaulted loans, the portfolio weighted average rating factor (WARF) stood at 9.01, translating to a weighted average rating (WAR) of A-/BBB+, as of January 2008. 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 RM870.0 million loan portfolio.

As at November 2007, overcollateralization (OC) ratios for Senior and Mezzanine bonds declined to 100.0% and 96.7%, below the required minimum of 105% and 104%,respectively. Nevertheless, Kerisma’s reported interest coverage (IC) ratios of 249.6% and 240.5% for the Senior and Mezzanine bonds, respectively, remained well above the minimum of 120%. The RM39.2 million cash in the liquidity reserve account continues to act as a liquidity buffer to meet potential interest shortfalls on the loans in relation to the senior and mezzanine bonds and is expected to be directed towards redeeming the senior and mezzanine secured bonds at maturity.

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