CapOne Bhd - 2009

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 AA- to BBB+ and from BBB- to C respectively. Additionally, MARC has assigned a negative outlook for Senior Class A-2 and a stable outlook to the ratings on all other classes. The lowered ratings are premised on MARC’s new cash flow runs incorporating an additional single obligor default on its RM40.0 million loan following its recent payment default on another obligation. The obligor’s ongoing restructuring of its debts is expected to result into a significant extension of its CLO loan’s maturity date beyond the legal final maturity date of the CLO programme. The rating actions incorporate the current available credit enhancement supporting the respective classes of bonds. The negative outlook attached to Senior Class A-2 reflects weakened overcollateralization and hence, vulnerability to further deterioration in the credit quality of underlying corporate loans.

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 in September 2005, 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 21 performing corporate loans from 11 different industry groupings, all of which are five-year non-amortizing loans with a single bullet repayment due in September 2010. From September 2008 to January 2009, the portfolio experienced two downgrades, one of which was to BBB+ from A-. The other obligor was downgraded to C from B and was further lowered to D in January 2009. Although the obligor has not missed any interest payments on its CLO loan to date, it has defaulted on a scheduled redemption of an existing secured borrowing. The portfolio manager has informed that the obligor is currently restructuring its debts and as a consequence, the repayment of the obligor’s CLO loan is expected only from 2017 onwards. Under MARC’s criteria, this amounts to a default.

Excluding the four defaulted loans, the portfolio weighted average rating factor improved to 9.55 in January 2009 from 11.36 in October 2008 translating to a weighted average rating (WAR) of A-/BBB+. Nevertheless, with the decline in performing loans to RM840.0 million from RM880.0 million, the results of MARC’s cash flow runs using the revised default rates at each rating level indicated that the Super Senior, Senior and Mezzanine bonds were able to withstand the stresses at the AAA, BBB+ and C rating levels respectively.

As of January 2008, the overcollateralization (OC) ratios have deteriorated to 140.0%, 98.8% and 93.3% (per MARC’s computation) from 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 exceed the minimum required level of 120%. As at January 2009, the credit enhancement for the Super Senior, Senior and Mezzanine bonds were 46.0%, 3.0% and 0.0% (September 2008: 52.6%, 7.7% and 1.7%) respectively.

With the expectation of further deterioration in the global and local economy in the near term, MARC holds the view that obligors shadowrated BBB+ and below which currently account for around 10 of the portfolio’s 21 performing loans will be vulnerable to further negative credit migration. CapOne bonds are at risk of further downgrade as the likelihood of improvement in the business climate prior to maturity of the bonds in 2010 is low. MARC will continue to monitor the performance of the transaction closely to ensure that our ratings on CapOne remain consistent with available credit enhancement.

Strengths

• Liquidity support provided by a non-amortizing liquidity reserve account.

Weaknesses

• Heightened risk of further declines in credit quality and corporate earnings growth of the obligors; and
• No recoveries to date in respect of the four defaulted obligors.