CREDIT ANALYSIS REPORT

CapOne Bhd - 2008

Report ID 2833 Popularity 1793 views 100 downloads 
Report Date Apr 2008 Product  
Company / Issuer CapOne Bhd Sector Primary CLO
Price (RM)
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Rationale

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 and downgraded RM50.0 million Mezzanine Class B bonds and RM100.0 million subordinated secured bonds from AA to A- and B to C respectively. At the same time, the ratings were removed from MARC Watch, where they had been placed on March 28, 2008. Following a recent obligor default, MARC has reviewed the results of stress tests on the ability of the super senior, senior and mezzanine bonds to withstand revised default rates on the remaining RM880.0 million loan portfolio at their respective rating levels. The ratings on the Super Senior and Senior bonds continue to be consistent with the credit enhancement available for each respective class. The lowered ratings on the Mezzanine Class B bonds and subordinated bonds reflect further par erosion of the collateral pool securing the rated bonds and a reduction in excess spread generated by the performing loans in the pool. Following the recent default, all excess spread has been diverted to the liquidity reserve account to build up account to its targeted level of RM45.0 million.

CapOne is a bankruptcy remote special-purpose company, 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.

Since closing, the underlying portfolio comprising 25 corporate loans experienced a total of 14 downgrades. During the six months from 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 rating of the other obligor from the transportation sector had been downgraded due to its aggressive overseas expansion plans which had strained its cash flow and resulted in a high debt leverage. Notwithstanding the rating migration, the percentage of obligors rated A- and above remains unchanged at 44.5% of the total portfolio.

To date, the underlying portfolio consists of 22 performing corporate loans from 12 different industry groupings, all of which are five-year non-amortizing loans with a single bullet repayment. Excluding the three defaulted loans, the portfolio weighted average rating factor stood at 9.39 translating to a weighted average rating (WAR) of A-/BBB+. There have been no recoveries to date, well below MARC’s initial stressed recovery assumption of 20% with a two years time lag.

As at 19 March 2008, the overcollateralization (OC) ratios declined to 146.7%, 103.5% and 97.8% (per servicer’s computation) for the Super Senior, Senior and Mezzanine bonds respectively arising from the obligor default. The OC ratios for the Senior and Mezzanine bonds have fallen below their required minimum levels of 105.0% and 102.0% respectively. Nonetheless, CapOne’s interest coverage (IC) ratios were 297.2%, 220.1% and 207.2% for Super Senior, Senior and Mezzanine bonds respectively, well above the minimum required level of 120%. As at 28 March 2008, the balance of liquidity reserve account stood at RM32.0 million. MARC expects the liquidity reserve account to reach its target level of RM45.0 million by September 2009 in the absence of further obligor defaults.

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