MARC has lowered its rating on Prima Uno Berhad’s (Prima Uno) RM335 million Super Senior B, RM190 million Senior and RM40 million Mezzanine bonds to AA+, BB and C from AAA, A- and B respectively. At the same time, the AAA rating on the RM290 million Super Senior A and the C rating on the RM95 million Subordinated bonds are affirmed. The rating outlook on Super Senior A, Super Senior B and Senior bonds is negative. The affirmed rating on the Super Senior A bonds reflects the ability to withstand loan defaults in a MARC ‘AAA’ stress scenario while rating downgrades of the Senior and Mezzanine bonds indicate the potential for principal shortfall at maturity following four additional obligor defaults since MARC’s last review in March 2010. The lowered rating of the Super Senior B bonds and negative outlook on the Super Senior bond classes and Senior bonds reflects susceptibility and reduced tolerance to further loan defaults from certain obligors with weak liquidity positions.
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.
Since the last review in March 2010, four more obligors defaulted on their July interest payments. With the recent defaults, the total number of obligor defaults to date has increased to eight, leaving the portfolio with 25 performing corporate loans of RM740 million, down from RM840 million as at March 2010. Collateralisation levels for the Super Senior B, Senior and Mezzanine bonds are presently below the minimum required levels at 118.4%, 90.8% and 86.5% respectively as of July 26, 2010. Meanwhile, liquidity reserves have fallen to RM28.6 million after the July interest payment, from RM29.9 million in March 2010. MARC believes that recovery prospects on the defaulted loans are very poor and has assumed zero recovery of principal outstanding for the remaining tenure of the rated bonds.
Excluding the defaulted loans, the portfolio’s weighted average rating (WAR) factor as of July 26, 2010, weakened to 11.10% from 7.87% back in January 2007, reflecting a transition of portfolio credit quality to BBB/BBB+ from A-. MARC has 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. While the Super Senior B bonds are still able to withstand a ‘AAA’ stress scenario, MARC notes that the Super Senior B bonds are only capable of withstanding further loan defaults of up to about RM115 million before experiencing principal losses.
Of the 25 performing obligors in the collateral pool, two have fallen below the BBB rating threshold and triggered the mandatory loan prepayment provision. MARC’s concerns center on obligors within the ‘BBB’ rating band with weak liquidity metrics. 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.