RCE ADVANCE SDN BHD - 2016

MARC has affirmed its ratings of A and BBB on special purpose vehicle RCE Advance Sdn Bhd’s (RCEA) outstanding RM5 million Class B and RM10 million Class C notes under the RM420 million Fixed Rate Medium-Term Notes (MTN) Programme respectively. The outlook on the ratings is stable. There is currently no outstanding Class A notes under the programme upon the repayment of RM5 million on November 15, 2016.

The rating on the Class B notes reflects the adequate collateral coverage provided by RCEA’s portfolio of IER that was acquired from parent company RCE Marketing Sdn Bhd (RCEM). The IER consist solely of personal loans granted to civil servants who are members of Koperasi Wawasan Pekerja-Pekerja Berhad (KOWAJA). The rating on the Class B notes also considers the credit linkage between RCEA and RCEM given the latter’s undertaking to maintain three-month collateral coverage ratios of 1.66 times on the Class B notes. The Class C notes continue to be rated one notch below RCEM’s corporate credit rating (CCR) of BBB+ to reflect its subordination to the Class B notes in respect of security ranking and payment priority. All the notes are backed by an irrevocable corporate guarantee from ultimate parent RCE Capital Berhad (RCE Capital) which relies on RCEM for over 90% of its consolidated revenue and net profits.

During the period under review, RCEA’s IER pool continued to demonstrate improvements in respect of delinquency and default rates owing to the direct salary deduction from civil servants through Angkatan Koperasi Kebangsaan Malaysia Berhad (ANGKASA). The over-collateralisation ratio on the Class B notes stood at 132.2% on the back of total outstanding IER balance of RM3.78 million. MARC believes that RCEM’s unencumbered loans and receivables of RM110 million as at January 31, 2017 are supportive of the full redemption of the remaining Class B and Class C notes in March 2017. Following the full redemption, there is no outstanding amount under the RM420 million MTN Programme.

For the financial year ended March 31, 2016 (FY2016), RCEM recorded a higher net interest income of RM110.6 million (FY2015: RM95.6) and an improved net interest margin of 8.78% (FY2015: 8.27%) through the introduction of improved risk-based products and a larger loan base. MARC expects RCEM’s earnings and loan growth to improve following the reduction of the Overnight Policy Rate (OPR) to 3% in July 2016 by Bank Negara Malaysia (BNM) and increased demand from civil servants following their salary increments from July 1, 2016 onwards as tabled in the 2016 Budget.

The stable outlook reflects MARC’s expectation that RCEA’s designated accounts will build up sufficient funds to meet the principal repayments of the respective MTN classes via income from the IER and/or cash injection by RCEM in the form of repurchase of IER from RCEA.

Major Rating Factors

Strengths

• Automatic salary deductions service the identified eligible receivables (IER);
• Structural mechanism for substitution of defaulted and prepaid IER; and
• Parent company to provide new IER or funds to maintain a three-month collateral coverage of 166% for Class B notes.

Challenges/ Risks

• Tighter government regulations on personal loan financing activities; and
• Weakening credit metrics of parent company.