CREDIT ANALYSIS REPORT

Prima Uno Bhd - Mar 2010

Report ID 3597 Popularity 1910 views 66 downloads 
Report Date Apr 2010 Product  
Company / Issuer Prima Uno Bhd Sector Primary CLO
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Rationale

MARC has affirmed its ratings of Prima Uno Berhad’s (Prima Uno) RM290 million Super Senior A and RM335 million Super Senior B bonds at AAA respectively with a stable outlook. Concurrently, the ratings for the RM190 million Senior, RM40 million Mezzanine and RM95 million Subordinated bonds have been downgraded to A-, B and C from AAA, AA and BB- respectively, with a negative outlook. The affirmed ratings and stable outlook for the Super Senior A and Super Senior B bonds reflect the adequate credit enhancement available to support the ratings at a ‘AAA’ rating level. The lowered ratings of Senior, Mezzanine and Subordinated bonds, meanwhile, consider the continued deterioration in the credit quality of performing loans within the pool, as well as recent loan defaults which have impacted overcollateralisation (OC) levels and excess spread.  Consequently, the slower-than-expected build-up of the liquidity reserve account has impacted the credit enhancement available for the respective tranches. The lowered ratings are now consistent with the reduced credit enhancement available to Senior, Mezzanine and Subordinated bonds. The negative rating outlook on the Senior, Mezzanine and Subordinated bonds reflect the expectation of further downward obligor rating migration as MARC foresees continued pressure on the credit quality of lower-rated performing obligors.

Prima Uno is a bankruptcy remote special-purpose company incorporated in Malaysia, established for the purpose of implementing and carrying out this primary collateralised loan obligation (CLO) programme. Upon closing, RHB Investment Bank Berhad, the originator, transferred its rights, title and interest in, to and under a pre-identified RM950 million static portfolio of corporate loans to Prima Uno. The transaction has been structured as a true sale of a newly originated corporate loans portfolio by the originator. The purchase of corporate loans was funded by proceeds from the issuance of the secured bonds.

At closing in January 2007, the collateral pool consisted of 33 five-year semi-annual interest-bearing loans with single bullet principal repayment in January 2012. During the period under review, April 2009 to March 2010, the portfolio experienced two more defaults, leaving the portfolio with 29 performing corporate loans from 12 different industries. One of the defaulted obligors had been pre-emptively downgraded to D in October 2009 following payment default on another debt obligation before missing an interest payment under Prima Uno in January 2010. The other obligor missed its interest payment under Prima Uno in July 2009. MARC has determined the recovery prospects on the defaulted loans to be poor and has assumed zero recovery of principal outstanding during the bonds' remaining tenure to maturity.

The recent defaults have led to lower collateralisation levels of the Super Senior A (289.7%), Super Senior B (134.4%), Senior (103.1%) and Mezzanine (98.2%) bonds in the loan portfolio as well as breach in the OC test at the Super Senior B level as confirmed by the transaction’s servicer in January 2010. This triggered an early redemption of the unsubordinated bonds (in order of loan loss priority). Due to the slow build-up of the liquidity reserve account to only RM29.9 million as of February 2010, an early redemption of the unsubordinated classes (the minimum required amount is RM45 million) has not been triggered. MARC does not expect the minimum required amount for early redemption to be met over the next 12 months given the transaction's reduced excess spread. Neither does the rating agency expect mandatory loan prepayments to contribute meaningfully towards the build-up of the reserve account.

The credit quality of the collateral pool showed further deterioration during the period under review with 10 rating downgrades (excluding the defaults) on the obligors. Mandatory prepayment provisions have been triggered for three obligors. As of March 2010, the portfolio’s weighted average rating (WAR) factor, which is an indicator of expected cumulative default, weakened to 15.11% from 9.71% back in April 2009, reflecting a transition of portfolio credit quality to BBB from A-/BBB+. MARC’s WAR computation excludes defaulted loans. MARC generated new cash flow runs for Prima Uno to determine the level of future defaults that the respective bond tranches can withstand under various stressed scenarios while still paying all of the interest and principal on the bonds. The results of the cash flow runs indicate that while Super Senior A and Super Senior B bonds can still withstand a ‘AAA’ stress scenario, the Senior and Mezzanine bonds are exposed to high likelihood of default at maturity.

MARC will continue to monitor the performance of the transaction closely to ensure that its ratings on Prima Uno remain consistent with available credit enhancement.

Strengths

  • Liquidity support provided by a non-amortising liquidity reserve account; and
  • Credit enhancement commensurates with the respective rating levels for the super senior, senior and mezzanine secured bonds.

Weaknesses

  • Heightened risk of further decline in credit quality and corporate earnings performance of the obligors on weaker economic prospects; and
  • No recoveries to date in respect of the four defaulted obligors.
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