MARC is currently undertaking the annual review on CapOne Berhad’s (CapOne)  secured fixed rate asset-backed bonds comprising of RM600 million Super Senior Class A-1, RM250 million Senior Class A-2, RM50 million Mezzanine Class B and subordinated secured variable rate asset-backed bonds of RM100 million.

Based on the portfolio review of the corporate loan borrowers (obligors), the portfolio has experienced eleven downgrades, one of which was downgraded to D. This has resulted in the portfolio’s weighted average rating (WAR) deteriorating from A- to A-/BBB+ with an increase in weighted average rating factor from 7.54 to 8.90. The downgrade of the said obligor to D resulted from its failure to meet the interest payment on their loan under the transaction due on 18 September 2006. The company’s present management has lodged a police report on 10 September 2006 with regards to alleged financial irregularities that may be fraudulent in nature in relation to the company’s reorganisation plans undertaken at end 2005. As at 18 September 2006, the portfolio’s exposure to credits rated A- and above represented 51% (as at closing: 68%).

Apart from the default, the other downgrades were due to deteriorating credit quality resulting from tougher operating environment brought about by stiff competition in the construction and engineering industry exerting downward pressure on margins and raw material prices. Nonetheless, the performance of the portfolio was also to a certain extent influenced by corporate behaviour, such as, ventures into different business segments or industries which either carry a higher risk profile or for which the companies have no previous track record, assuming higher debt leverage position and reporting lower cashflow coverages. The companies which were downgraded belong to the automotive; buildings, materials and real estate; construction and engineering; utilities; telecommunication; food, beverage and tobacco; and electronics industry segments.

CapOne is a bankruptcy remote special-purpose company incorporated in Malaysia, established for the primary purpose of undertaking this primary collateralized loan obligation (CLO) programme. At closing of the transaction, EON Bank Bhd (EON Bank) as the originator transferred its rights, title and interest in, to and under a pre-identified portfolio of corporate loans to CapOne. The transaction is structured as a true sale of the corporate loans portfolio from the originator. As this is a primary CLO, none of the corporate loans in the pre-identified portfolio were direct transfers from EON Bank’s books.

MARC will closely monitor the progress of discussion between the transaction parties with regards to the defaulted obligor and assess the potential for recovery of the defaulted loan which will be factored into the rating action. MARC will announce the rating action within three weeks of this announcement.