Tuesday, Aug 15, 2006

MARC has reaffirmed the rating of Kerisma Bhd’s (Kerisma) RM870.0 million senior secured bonds at AAA; and, downgraded the RM30.0 million mezzanine secured bonds and RM100.0 million subordinated secured bonds from AA and BB to AA- and BB- respectively. The downgrades are premised on the decline in the weighted average rating (WAR) of Kerisma’s portfolio of corporate loans to A-/BBB+ from A- previously, following a default of one obligor and the ability of the mezzanine bonds to currently withstand AA- stress as opposed to AA stress scenario. Despite the decline in the portfolio WAR, the senior bonds are still able to withstand a AAA stress which supports its reaffirmation. In addition, none of the performance tests have been triggered. The senior and mezzanine bondholders also benefit from the overcollateralization arising from the respective subordination levels, sufficient interest coverage and additional credit enhancement afforded by RM26.1 million in the liquidity reserve account which is expected to build up to RM45.0 million funded by excess spread (every six months) over time.

Kerisma is a bankruptcy remote special-purpose company incorporated in Malaysia, established for the purpose of implementing and carrying out this primary collateralized loan obligation (CLO) programme. At closing of the transaction, the originator - Alliance Merchant Bank Bhd (Alliance Merchant) transfered its rights, title and interests in a pre-identified RM1,000.0 million static portfolio of corporate loans to Kerisma. The transaction is structured as a true sale of newly-originated corporate loans portfolio from the originator. The proceeds from the issuance of the bonds were utilised to fund the purchase of the portfolio.

The underlying portfolio of corporate loans consists of 25 individual obligors from 16 different industry categories with a WAR of BBB. However, excluding the defaulted loan which will not be contributing cashflows to the transaction going forward apart from potential recoveries (if any), the portfolio WAR in respect of the remaining 24 obligors is at A-/BBB+.  Given the WAR of A-/BBB+, MARC ran a series of stress tests at each rating level to assess the ability of the senior and mezzanine bonds to withstand revised default rates employed (default rates increases for each rating level as WAR declines or deteriorates) on the remaining RM955.0 million loan portfolio. MARC is of the opinion that the senior and mezzanine bonds are resilient against further downgrades up to the portfolio WAR of BBB+.

During the current review, the portfolio experienced 10 downgrades, two of which were downgraded to BBB- and D respectively; and three upgrades. The loan borrower which was downgraded to BBB- belongs to the transportation industry and the BBB- rating triggers a mandatory loan repayment. A loan borrower was downgraded to D following its failure to make interest payment due on the interest payment date, 5th June 2006. The borrower belongs to building, material and real estate sector. Kerisma has since declared an event of default and the trustee has issued a letter of demand on 10 July 2006 to recover the outstanding loan amount of RM45.0 million. Apart from the downgrades of the two obligors to BBB- and D, the other downgrades are attributed to deteriorating credit quality due to tougher operating environment brought about by cut-back in government spending, rising oil prices, rising inflation rate and overall increase in cost of doing business. While the decline in credit quality of some of the obligors is attributed to these factors, the performance of the portfolio is to some extent dependent on corporate behaviour, such as, maintaining a prudent leverage, not pursuing risky diversification, amongst others.

For the period under review, Kerisma adhered to the performance tests under this CLO programme, namely the Overcollateralization Test (OC) and Interest Coverage Test (IC). As at June 2006, Kerisma posted overcollateralization ratios of 114.9% and 111.1% respectively for the senior and mezzanine bonds, well above the covenanted level of 105.0% and 104.0% respectively. In addition, Kerisma’s interest coverage ratios were reported at 194.5% and 187.5% for Senior and Mezzanine bonds respectively, against the minimum required ratio of 120%. As additional credit enhancement to the bondholders (besides the OC and IC tests), RM26.1 million in the liquidity reserve account, acts as a liquidity buffer to meet potential shortfall in the interest payments from the loans for senior and mezzanine bonds as well as to cover for losses (from defaults) suffered on the underlying portfolio. The liquidity reserve balance includes RM13.1 million of excess interest collections trapped as at June 2006 triggered by the default of one of the obligors. As there is another three years to final legal maturity since the occurrence of the default, MARC expects there is sufficient time to build the reserve account up to targeted RM45.0 million from the excess spread for the benefit of senior and mezzanine bondholders.
MARC continues to monitor the progress of legal action and assess the potential for recovery of the defaulted loan.