CapOne Bhd - 2010 Credit Commentary Report

MARC lowered its rating on CapOne Berhad’s (CapOne) RM250 million Senior Class A-2 bonds to C from B. At the same time, the AA+ rating on the RM600 million Super Senior Class A-1 and the C rating on the RM50 million Mezzanine and RM100 million Subordinated bonds are affirmed. The outlook remains negative. The downgrade of Class A-2 bonds is premised on collateral deterioration following two additional obligor defaults involving a total loan exposure of RM80 million. MARC anticipates that collateral principal collection will not be sufficient to cover the Class A-2 bonds at their legal and final maturity in September 2010. The negative outlook attached to Super Senior Class A-1 bonds reflects the vulnerability of the portfolio to continued credit migration, the low likelihood of substantial recovery of defaulted underlying loans and the heightened risk of obligors rated BBB- and below defaulting on their mandatory loan prepayments in the remaining months before September 2010.

CapOne is a bankruptcy remote special purpose company, established for the purpose of implementing and carrying out the primary collateralised 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 billion 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.

Credit deterioration of the collateral pool is observed in two more obligors defaults on interest payment date from December 2009 to May 2010. This brings the total number of obligor defaults to eight, excluding which the average credit rating (as measured by the weighted average rating factor) has declined to BBB-/BBB. MARC has determined that sufficient credit enhancement remains within the transaction to support the AA+ rating currently assigned to the Super Senior Class A-1. However, with only 17 remaining performing loans, it is noted that the Super Senior Class A-1 is in a position to withstand further loan defaults of only up to RM80 million before experiencing principal erosion.

Meanwhile, the overcollateralisation test ratios for the Senior Class A-2 and Mezzanine Class B remain below 100% at 80.0% and 75.6% respectively as at May 1, 2010. MARC is concerned about the potential for additional obligor defaults in the remaining months before September 2010. Approximately 23.4%, or RM160 million of the remaining performing loans are currently rated BBB- and below. MARC assesses that the ability of these obligors to repay their loans in full is low. The rating agency believes that given the uncertain prospects of material near-term improvements in operating cash flow generation, this class of obligors will be highly dependent on asset sales and alternative sources of funding to meet their loan repayments.

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