RCE Advance Sdn Bhd - 2008

MARC has affirmed 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 ratings carry a stable outlook. The affirmation and stable outlook are premised on the satisfactory performance of the securities’ underlying portfolio; the maintenance of the minimum covenanted collateral cover ratio of 1.66 times for Class A and Class B notes, supported by an undertaking from RCE Marketing Sdn Bhd (RCEM) to provide the requisite receivables/funds; and strong cash balances in the designated accounts totaling RM137.4 million as of September 30, 2008. In addition, the transaction benefits from the establishment of a master collection account to mitigate commingling risk and at-source salary deductions administered by Angkatan Koperasi Kebangsaan Malaysia Bhd (Angkasa). The ratings are moderated by the expected slowdown in consumer spending which may dampen receivables growth thus affecting RCEM’s ability to substitute the ineligible receivables.

RCEA, a special purpose company wholly-owned by RCEM, was incorporated for the purpose of periodically purchasing selected portfolios of eligible personal receivables from RCEM. The receivables consist of scheduled repayments (principal plus interest) of loans disbursed to government employees who are members of Koperasi Wawasan Pekerja-Perkerja Berhad (Kowaja), form the source of repayment for the Facility.  Each transfer of receivables to RCEA involves an absolute legal assignment of all of RCEM’s rights, title and interest in and to the receivables. 

RCEM’s creditworthiness remains a key rating consideration for the rated bonds on account of its ability to generate performing substitute receivables or the necessary funds to top up any shortfall in the sinking fund account. As such, Class A and Class B notes are rated two and one notches above the standalone corporate credit rating of RCEM respectively, a reflection of the credit and structural support backing the notes. MARC notes that since issuance, RCEM has provided sufficient receivables/funds to maintain the required minimum collateral cover ratio. The rating of Class C notes is one notch below the rating of RCEM, reflecting the subordination to Class A and Class B notes in respect of coupon payment and principal repayment. The corporate credit rating of RCEM has been maintained at A-. The bonds are also secured by a corporate guarantee from RCE Capital Berhad, RCEM’s ultimate holding company.

RCEM assumes the role of servicer under the transaction, administering and monitoring collections from 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 September 30, 2008, RM420.0 million MTN remain outstanding backed by six portfolios of outstanding receivables totaling RM378.0 million and RM137.5 million cash.

During the period under review (October 2007 to September 2008), on average, actual collections exceeded the scheduled collections primarily due to prepayments. The average monthly delinquency and default rates remained low ranging from 1.6% - 2.8% and 0.2% - 0.3% respectively. Prepayment rates remained stable ranging from 0.9% to 1.1%. As at September 30, 2008, the cash balances in each designated accounts for all the tranches, were more than sufficient to meet the first principal redemption of Class A notes for the said tranches (dates for first principal redemptions ranging from December 2008 to November 2009).

RCEM is principally involved in the provision of personal loans and consumer financing of electrical home appliances and other consumer durable products to cooperative members. RCEM’s revenue in FY2008 continued on an uptrend, reporting a 35% growth on the back of a larger portfolio of receivables. Operating profit margin remained strong but suffered a marginal decline to 50.7% (FY2007: 56.5%) in line with the higher funding costs associated with its subsidiaries’ securities issuances. Consequently, RCEM’s debt-to-equity ratio rose to 3.5 times. Going forward, RCEM’s profit will likely to be more volume-driven with the narrowing of its interest margins.  Although the company’s unaudited 1HFY2009 results show a slight decline in gearing to 3.4 times as at September 30, 2008, MARC expects RCEM’s gearing to remain high in view of the continued reliance of its subsidiaries on borrowings to fund the generation of receivables.

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Challenges