RCE Advance Sdn Bhd - 2010

MARC has affirmed its ratings of A+, A and BBB+ on outstanding Class A, B and C notes issued by RCE Advance Sdn Bhd (RCEA) under its RM420 million Fixed Rate Medium Term Notes Programme. The ratings affect RM115 million of outstanding notes under Class A, RM105 million under Class B and RM60 million under Class C. The ratings outlook has been revised to negative from stable.

RCEA is a special purpose company wholly owned by RCE Marketing Sdn Bhd (RCEM), the originator of the six collateral pools of personal loans backing the rated notes. The collateral pools for this transaction consist solely of loans to members of Koperasi Wawasan Pekerja-Pekerja Berhad (KOWAJA), RCEM's largest lending conduit. RCEM has a continuing role under the transaction to replace defaulted and/or prepaid loans to maintain the transaction's three-month collateral cover ratio of 1.66 times at all times. RCEM has also provided an undertaking to cover any shortfall in the sinking fund account for the notes. The notes also benefit from an irrevocable guarantee from RCE Capital Berhad, the ultimate holding company of RCEM.

The outlook revision considers increased regulatory risk and, consequently, uncertainty around RCEM's ability to maintain the transaction's collateral cover ratio at the required level as a consequence of KOWAJA ceasing loan disbursements to civil servants since December 1, 2010. KOWAJA will only be able to resume disbursing loans after a plan to comply with the guidelines of industry regulator Cooperative Commission of Malaysia (CCM) has been submitted to the latter. MARC considers the availability of RM200.0 million pool of unpledged loan receivables held by RCEM and RCEB’s corporate guarantee as factors that could mitigate risk of near-term deterioration in the collateral cover ratio.

This development does not impact the servicing arrangements for existing loans originated through KOWAJA. MARC understands that all loan disbursements up to November 30, 2010 by KOWAJA will continue to be serviced through salary deductions. However, should the situation remain unresolved for an extended period of time and higher-than-anticipated levels of prepayments and/or defaults be experienced, RCEM could be challenged to maintain its collateral cover covenant.

The affirmed ratings, meanwhile, reflect the satisfactory performance of the collateral pools which are comprised of 12,554 seasoned accounts with total outstanding principal of RM268.3 million and average remaining maturity of 61.2 to 69.5 months. The collateral pools' average monthly default rate, which fell between 0.3% and 0.4% for the period covering October 2009 through September 2010, remained within MARC's expectations.

MARC noted, however, that prepayments rose sharply post-July 2010 due to refinancing activity. Average monthly prepayment rates ranged between 1.4% and 2.2% during the same period compared to the range of 1.0% to 1.5% observed during MARC's last review. The higher prepayment rate was mitigated by RCEM's ability to replace the prepaid loans with new performing receivables. Its collateral cover ratio was measured at 1.7 times as of September 30, 2010. MARC will closely monitor the performance of the collateral pools post-December 1, 2010 to assess the implications of the recent developments for the ongoing performance of the transaction going forward.

RCEM's credit metrics remained broadly unchanged since MARC's December 2009 review. RCEM's profitability remained strong for the 12 months ended March 31, 2010, as evidenced by its double-digit net interest margin of 14.0%.  At the same time, MARC believes that regulatory pressures will likely to pressure the profitability of RCEM and its industry counterparts in subsequent periods. Its asset quality metrics showed improvement; its gross non-performing loan ratio dropped to 2.5% as at end March 2010 compared to 3.5% a year earlier. RCEM has been actively tapping bond market funding to support the growth in its loan book. Its near-term loan growth is likely to be muted as a result of recent developments.

The rating outlook could return to stable once regulatory uncertainty abates and MARC is satisfied that RCEM's ability to maintain the transaction's collateral cover covenant is not compromised by recent developments.

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Challenges