CAGAMAS MBS BERHAD (CMBS 2007-2) - 2018

MARC has affirmed its AAA rating on Cagamas MBS Berhad’s RM2,410.0 million asset-backed fixed rate serial bonds (CMBS 2007-2) with a stable outlook.

Cagamas MBS is a wholly-owned special purpose vehicle of Cagamas Holdings Berhad and was established to undertake the securitisation of conventional and Islamic home financing originated by the Malaysian government. CMBS 2007-2 is backed by a pool of government staff housing loans (GSHL), or Portfolio 2007-2.

The affirmed rating is based on CMBS 2007-2’s strong credit enhancement level of 217.4% as at August 31, 2017 (Quarter 42) with an outstanding principal of non-defaulted mortgage loans of RM906.2 million and a combined cash at bank and permitted investments of RM430.9 million. The bond programme has an outstanding amount of RM615.0 million as at end-August 2017.

The rating also incorporates the good credit quality of the underlying collateral pool of GSHL (Portfolio 2007-2) which comprises 38,859 accounts. MARC observes that the collateral pool has continued to demonstrate strong performance, with a cumulative default rate (CDR) of 0.54% as at Quarter 42. MARC has revised its base case final CDR for Quarter 80 to 3.41% from the initial projection of 8.19% with an assumed quarterly default rate of 0.08% for the remaining 9.5 years of CMBS 2007-2. Defined as GSHL accounts that are in arrears for more than nine months, the defaults were mainly due to incomplete accounts reconciliation and pending assessment on the status of borrower accounts as well as pending claims on mortgage reducing term assurance (MRTA). Default risk of the collateral pool is expected to remain low, underpinned by the mortgage payment mechanism through deductions of monthly salary or pension.

The cumulative prepayment rate on Portfolio 2007-2 stood at 14.48% as at Quarter 42, with the average quarterly prepayment rate remaining stable at 0.34% (Quarter 38: 0.36%). Risk of negative carry arising from higher-than-expected prepayments is addressed by the conditional pass-through mechanism that allows for early redemption of the bonds in reverse order with the last tranche being paid first. While Cagamas MBS may face liquidity risk in the event of lower-than-expected prepayments, the risk is deemed very low due to its strong liquidity buffer. As at end-August 2017, its cash and cash equivalents of RM430.9 million is sufficient to meet its next redemption of RM260.0 million under Tranche 5 due on August 22, 2019.

The stable outlook is premised on the rating agency’s expectations of continued stable collateral performance and a sustained high credit enhancement level that remains supportive of the rating.

Major Rating Factors

Strengths

• Substantial credit enhancement in the form of high over-collateralisation; and
• Low default rates of the collateral pool.

Challenges/Risks

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