Tuesday, Nov 19, 2002
Malaysian Rating Corporation Berhad (MARC) has assigned long-term ratings to Aegis One Berhad’s (Aegis One) RM900 million nominal value 5.2% asset backed senior bonds due 2007 and RM100 million nominal value variable rate asset backed subordinated junior bonds due 2007 of AAA (triple A) and BB (double B) respectively.
Aegis One is a bankruptcy remote special-purpose company incorporated in Malaysia, established for the purpose of implementing and carrying out a collateralized loan obligation (CLO) programme. The assigned rating of AAA for the senior bonds addresses the likelihood that investors will receive full and timely payments of interest on scheduled interest payment dates, as well as the principal on the bond payment date. The rating is based upon MARC’s evaluation of the credit quality of the underlying obligors; assessment of the obligor and industry concentrations forming the collateral pool of loans; the effectively static portfolio due to limited allowable substitution of loans; the level of protection provided by the subordinated junior bonds and the establishment of a non-amortizing reserve equal to three months of interest on the senior bonds, of which one and a half months is funded at closing.
The assigned rating of BB on the junior bonds addresses the ultimate payment of principal by the stated maturity date. The rating reflects its payment and loss allocation priority, the reserve account and available excess spread. The junior bonds were rated three notches below the lowest rated underlying loan.
Positive features in the transaction include a relatively good quality of underlying corporate loans with a weighted average rating of A-/ BBB+. Post closing, there are minimal negative carry and liquidity risk issues as the senior bonds and underlying loans both accrue interest on a semi-annual basis and are redeemable bullet at maturity. Semi-annual interest payments from the corporate loans are remitted directly to Aegis One’s collection account via direct debits and are allocated to the payment of senior bonds coupon the following business day. A matching of interest rate between the portfolio of loans and the senior bonds naturally hedges the structure. In addition, the usual set-off risks and commingling exposures associated with the originator retaining the servicer role are absent, as the servicer function will be undertaken by HSBC (Malaysia) Trustee Berhad (HSBC Trustee); while the monitoring of the portfolio of loans will be undertaken by Amanah SSCM Asset Management Berhad (Amanah SSCM).
MARC has assessed the credit quality of the underlying loan obligors. Where there are no publicly maintained MARC ratings or where there are ratings by other agencies, MARC assessed the underlying obligors based on publicly available information and when made available, any additional information obtained. Where there are publicly maintained MARC issuer or corporate credit ratings, MARC would employ those ratings assigned. Where there are publicly maintained MARC corporate debt ratings, MARC assessed the ratings, excluding any structural enhancement built into the corporate debt ratings assigned. MARC’s assessment takes into consideration the industry risks, competitive position and financial risks of the individual obligors
The underlying pool of corporate loans is fairly concentrated, having only 25 obligors. As the senior bonds are collateralized by the pool of underlying loans, the transaction is susceptible to an overall deterioration in the underlying loan credit quality. The transaction is also exposed to bullet payment risk, while a lack of historical recovery data for defaulted debt makes it difficult to estimate recovery values. However, risk mitigants include the subordination levels provided in the capital structure and the establishment of overcollateralization and interest coverage (OC and IC) triggers affording senior bondholders some protection by diverting cash from junior bonds to pay down the senior bonds in the event there is a failure of one or both tests. MARC has also analyzed scenarios incorporating payment timing defaults at due date as part of the cash flow stress testing. As for recovery values, MARC has incorporated a two-year lagged recovery assumption of 20% for senior unsecured corporate debt.
As the portfolio manager plays a crucial role in the transaction post closing, Amanah SSCM’s ready access to market information and conscientious management style are positive considerations.
Aegis One is a bankruptcy remote special-purpose company incorporated in Malaysia, established for the purpose of implementing and carrying out a collateralized loan obligation (CLO) programme. The assigned rating of AAA for the senior bonds addresses the likelihood that investors will receive full and timely payments of interest on scheduled interest payment dates, as well as the principal on the bond payment date. The rating is based upon MARC’s evaluation of the credit quality of the underlying obligors; assessment of the obligor and industry concentrations forming the collateral pool of loans; the effectively static portfolio due to limited allowable substitution of loans; the level of protection provided by the subordinated junior bonds and the establishment of a non-amortizing reserve equal to three months of interest on the senior bonds, of which one and a half months is funded at closing.
The assigned rating of BB on the junior bonds addresses the ultimate payment of principal by the stated maturity date. The rating reflects its payment and loss allocation priority, the reserve account and available excess spread. The junior bonds were rated three notches below the lowest rated underlying loan.
Positive features in the transaction include a relatively good quality of underlying corporate loans with a weighted average rating of A-/ BBB+. Post closing, there are minimal negative carry and liquidity risk issues as the senior bonds and underlying loans both accrue interest on a semi-annual basis and are redeemable bullet at maturity. Semi-annual interest payments from the corporate loans are remitted directly to Aegis One’s collection account via direct debits and are allocated to the payment of senior bonds coupon the following business day. A matching of interest rate between the portfolio of loans and the senior bonds naturally hedges the structure. In addition, the usual set-off risks and commingling exposures associated with the originator retaining the servicer role are absent, as the servicer function will be undertaken by HSBC (Malaysia) Trustee Berhad (HSBC Trustee); while the monitoring of the portfolio of loans will be undertaken by Amanah SSCM Asset Management Berhad (Amanah SSCM).
MARC has assessed the credit quality of the underlying loan obligors. Where there are no publicly maintained MARC ratings or where there are ratings by other agencies, MARC assessed the underlying obligors based on publicly available information and when made available, any additional information obtained. Where there are publicly maintained MARC issuer or corporate credit ratings, MARC would employ those ratings assigned. Where there are publicly maintained MARC corporate debt ratings, MARC assessed the ratings, excluding any structural enhancement built into the corporate debt ratings assigned. MARC’s assessment takes into consideration the industry risks, competitive position and financial risks of the individual obligors
The underlying pool of corporate loans is fairly concentrated, having only 25 obligors. As the senior bonds are collateralized by the pool of underlying loans, the transaction is susceptible to an overall deterioration in the underlying loan credit quality. The transaction is also exposed to bullet payment risk, while a lack of historical recovery data for defaulted debt makes it difficult to estimate recovery values. However, risk mitigants include the subordination levels provided in the capital structure and the establishment of overcollateralization and interest coverage (OC and IC) triggers affording senior bondholders some protection by diverting cash from junior bonds to pay down the senior bonds in the event there is a failure of one or both tests. MARC has also analyzed scenarios incorporating payment timing defaults at due date as part of the cash flow stress testing. As for recovery values, MARC has incorporated a two-year lagged recovery assumption of 20% for senior unsecured corporate debt.
As the portfolio manager plays a crucial role in the transaction post closing, Amanah SSCM’s ready access to market information and conscientious management style are positive considerations.