CREDIT ANALYSIS REPORT

CapOne Bhd - 2009 Credit Commentary Report

Report ID 3249 Popularity 1506 views 91 downloads 
Report Date Jun 2009 Product  
Company / Issuer CapOne Bhd Sector Primary CLO
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Rationale

MARC has downgraded the rating of CapOne Berhad’s (CapOne) RM250.0 million Senior Class A-2 bonds to BB from BBB+; and affirmed the ratings of RM600.0 million Super Senior Class A-1 bonds, RM50 million Mezzanine Class B bonds and RM100.0 million subordinated secured bonds at AAA, C and C respectively. Concurrently, MARC has revised its outlook on the Super Senior Class A-1 to negative from stable. The lowered rating on the Senior Class A-2 bonds reflects the depletion of credit enhancement for the bonds arising from missed interest payment by an obligor on its RM35.0 million loan in March 2009 and lower than projected build-up of the liquidity reserve account. The foregoing indicates reduced likelihood of full repayment of principal upon maturity for Senior Class A-2, whose overcollateralization ratio is currently at 94.7%, below its minimum required ratio of 105.0%. The affirmed ratings on the Super Senior bonds reflects an adequate level of credit enhancement currently available to support the bonds at their original rating while revision outlook reflects weakened overcollateralization and continued vulnerability to further negative credit migration in the underlying collateral pool. The ratings on Mezzanine and Subordinated bonds remain at C, with a stable outlook reflecting a high likelihood of default at maturity.

Since MARC’s last rating action on February 13, 2009, downward rating migrations of three obligors, have resulted in deterioration of the weighted average rating factor to 14.4% from 9.55% in February 2009, reflecting a transition of the overall portfolio credit quality from A- to BBB as of June 2009.

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 20 performing corporate loans (25 at transaction close) from 11 different industry groupings, all of which are 5-year non-amortizing loans with a single bullet repayment due in September 2010. From February to June 2009, the portfolio experienced three downgrades, one of which was to C from BBB due to its selective default on a scheduled redemption of an existing unsecured borrowing. Of the two other obligors, one was downgraded to D from BBB and the other to D from A- after missing their March 2009 interest payments. The latter cured its default two weeks after its missed payment, and MARC subsequently raised its rating to BBB in May 2009, taking into account the company's actions to improve its liquidity position (a temporary liquidity shortfall had been the primary cause of its missed payment). MARC understands from the portfolio manager that three out of the five defaulted obligors intend to restructure their loans and as of June 10, 2009, two have submitted their proposals. Repayments from these obligors will be treated as recoveries.

As of June 2009, the over collateralization (OC) ratios have deteriorated to 134.2%, 94.7% and 89.4% (per MARC’s computation) from 140.0%, 98.8% and 93.3% 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 June 2009, the credit enhancement for the Super Senior, Senior and Mezzanine bonds were 40.3%, -1.0% and -6.5% (February 2009: 46.0%, 3.0% and 0.0%) respectively. Taking into consideration recent rating migrations, MARC has generated cash flow runs incorporating adjusted default rates under various stressed scenarios. The expected losses and resultant credit enhancement adequately supports the affirmed rating on the Super Senior Class A-1 bonds.

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