CapOne Bhd - 2008

MARC has affirmed the ratings of CapOne Berhad’s (CapOne) RM600.0 million Super Senior Class A-1 bonds and RM100.0 million subordinated secured bonds at AAA and C respectively; and downgraded the RM250.0 million Senior Class A-2 bonds and RM50.0 million Mezzanine Class B bonds from AAA to AA- and A- to BBB- respectively. At the same time, the ratings were removed from MARCWatch Negative, where they had been placed on October 6, 2008. The lowered ratings were premised on the results of MARC’s review of new cash flow runs for CapOne incorporating upward revision of default rates under various stressed scenarios. Negative migration in the credit quality of the underlying loan portfolio had earlier resulted in the deterioration of the collateral pool’s weighted average rating to BBB+/BBB from A-/BBB+. The current rating actions incorporate the current available credit enhancement supporting the respective classes of bonds. If there is further deterioration in the credit quality of underlying corporate loans, further rating actions may be warranted.

CapOne is a bankruptcy remote special-purpose company, established for the purpose of implementing and carrying out the 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 22 performing corporate loans from 12 different industry groupings, all of which are five-year non-amortizing loans with a single bullet repayment. From April 2008 to September 2008, the portfolio experienced one single-notch upgrade to A- from BBB+ and two downgrades, one of which was to A- from A. The other obligor was downgraded to BB+ from BBB+, which was further lowered by three notches to B from BB+ in October 2008. The downgrade of the obligor, which belongs to the automotive sector, was premised on its tight liquidity position and limited financial flexibility.

Excluding the three defaulted loans, the portfolio weighted average rating factor deteriorated to 11.36 in October 2008 from 9.39 in April 2008 translating to a weighted average rating (WAR) of BBB+/BBB. The results of MARC’s cash flow runs using the revised default rates at each rating level on the performing RM880.0 million loans within the collateral pool lead us to conclude that the Super Senior, Senior and Mezzanine bonds are able to withstand the stresses at the AAA, AA- and BBB- rating levels respectively.

As of September 2008, the overcollateralization (OC) ratios have been maintained at 146.7%, 103.5% and 97.8% (per servicer’s computation) for the Super Senior, Senior and Mezzanine bonds respectively. The OC ratios for the Senior and Mezzanine bonds remain 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 September 25, 2008, the credit enhancement for the Super Senior, Senior and Mezzanine bonds was 52.6%, 7.7% and 1.7% respectively.

Strengths

• Liquidity support provided by a non-amortizing liquidity reserve account; and
• Marginal improvement in the credit enhancement level for the Super Senior, Senior and Mezzanine secured bonds.

Weaknesses

• Deterioration in the weighted average rating of the loan portfolio to BBB+/BBB;
• Heightened risk of further declines in credit quality and corporate earnings growth of the obligors as economic outlook worsens; and
• No recoveries to date in respect of the three defaulted obligors.