CAGAMAS MBS BERHAD (CMBS 2005-2) - 2016

MARC has affirmed its AAA rating on Cagamas MBS Berhad’s (Cagamas MBS) asset-backed fixed rate serial bonds (CMBS 2005-2) of RM2,060.0 million with a stable outlook. The rating action affects the outstanding bonds of RM995.0 million issued under CMBS 2005-2. The affirmed rating reflects the robust credit enhancement level of 195.5% on CMBS 2005-2 based on an outstanding principal balance of non-defaulted mortgages of RM1,328.7 million and a collection account balance of RM616.8 million. In addition, the good performance track record of the underlying collateral pool (Portfolio 2005-2) which comprises government staff housing loans (GSHL) is a key rating factor.

Cagamas MBS is a wholly-owned special purpose vehicle of Cagamas Holdings Berhad established solely to issue mortgage-backed securities via the securitisation of eligible GSHL originated by the government under both Islamic and conventional principles. Direct salary/pension deductions which form the source of repayment for CMBS 2005-2 minimises repayment risk. Following the passing of the Public Sector Home Financing Board Act 2015, Bahagian Pinjaman Perumahan (BPP) was replaced by Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA), which is also under the Ministry of Finance, as the servicer of Portfolio 2005-2 on January 1, 2016. MARC notes that there were no changes in the servicer’s operations as LPPSA retained BPP’s existing resources and system.

Based on the latest servicer report dated June 13, 2016 (Quarter 42), Portfolio 2005-2 continued to exhibit high credit quality characteristics that were well within MARC’s expectations. Portfolio 2005-2 had a cumulative default rate (CDR) of 0.48% and a cumulative prepayment rate of 15.19%. The collateral pool’s CDR was comfortably below MARC’s assumed rate of 3.50%. GSHL defaults, defined as accounts in arrears for more than nine months, were mainly attributed to lags and delays in deductions due to changes in the eligibility status of borrowers and the time taken to process insurance claims on deceased borrowers. However, delinquency rates (mortgages in arrears between one and three months) during the period under review (Quarter 38 to Quarter 42) remained volatile, ranging between 1.89% and 6.28%. This was mainly due to data reconciliation issues following the migration to a new system (Sistem Pinjaman Perumahan Bersepadu) and a delay in a system update. Going forward, MARC expects the delinquency rate to stabilise as system issues are addressed.

Cagamas MBS has significant cash buffer in the collection account to meet the next redemption of RM345.0 million on December 12, 2017. To mitigate the risk of negative carry and asset-liability mismatches due to high prepayments, CMBS 2005-2 has a conditional reverse pass-through mechanism which allows for early redemption of the back-ended tranches. Given the transaction’s current strong credit enhancement level and stable historical default and prepayment rates, MARC views that Cagamas MBS has a strong capacity to withstand deterioration in Portfolio 2005-2’s performance. Nonetheless, MARC notes that the majority of Portfolio 2005-2’s borrowers would be retired civil servants during the tail-end tenure of CMBS 2005-2 which expires in 2025, given that the weighted average age of borrowers currently stands at 51.26 years. The rating agency expects the performance of the collateral pool in the longer term to be sustained by at-source pension deductions.

The stable outlook is premised on MARC’s expectation that Portfolio 2005-2 will continue to demonstrate a stable performance characterised by a high credit enhancement level that is supportive of the current rating.

Major Rating Factors

Strengths

• Robust credit enhancement level supported by high overcollateralisation;
• Satisfactory portfolio performance as reflected by healthy prepayment levels and low default rates; and
• Transaction structure provides sufficient credit protection.

Challenges/Risks

• Reinvestment risk associated with prepaid home financing; and
• Risk of negative carry from higher-than-expected prepayments.