Press Releases MARC’S ANNOUNCEMENT ON RATINGS FOR CAPONE BHD’S SUPER SENIOR, SENIOR AND MEZZANINE SECURED FIXED RATE ASSET-BACKED BONDS AND SUBORDINATED SECURED VARIABLE RATE ASSET-BACKED BONDS

Monday, Oct 23, 2006

MARC affirms three classes of bonds and downgrades one class of bonds issued by CapOne Berhad. The following rating actions are effective immediately:

--RM600 million super senior class A-1 notes affirmed at 'AAA'.
--RM250 million senior class A-2 bonds affirmed at 'AAA';
--RM50 million mezzanine bonds affirmed at 'AA'; and
--RM100 million subordinated bonds downgraded to 'BB-' from 'BB'.

CapOne Berhad is a primary collateralized loan obligation that closed in September 2005 and is secured by a static pool of corporate loans originated by EON Bank. The pool comprises wholly of 25 five-year non-amortizing loans with a single bullet repayment. Since the close of the deal, CapOne has suffered collateral deterioration. The portfolio has experienced ten downgrades, including one default which represents approximately 4.0% of the collateral in value terms.  As a result, the weighted average rating (WAR) of the portfolio has fallen from A- to A-/BBB+. Notwithstanding the declining collateral performance, the affirmed super senior, senior and mezzanine bond classes continue to meet and exceed specified performance tests. As at September 2006, the overcollateralization (OC) and interest coverage (IC) ratios for the three respective classes of bonds were well above their specified minimum thresholds. In conjunction with this review, MARC applied higher stressed default rates to the cash flow model in order to reflect the deterioration in the WAR of the portfolio. As a result of this analysis, MARC has determined that the super senior, senior and mezzanine bonds are able to withstand the revised default rates at their original rating levels. The sequential allocation of losses to the CLO tranches results in expected loss being concentrated in the subordinated bonds, and hence MARC is of the view that the original rating assigned to the subordinated bonds no longer reflects the current risk to its holders.
In addition, the credit enhancement primarily provided by the subordinated bonds, the super senior, senior and mezzanine classes are also protected by available excess spread at the semi-annual distribution dates, and a non-amortizing liquidity reserve that may be built up to a ceiling of RM45 million depending on the amount of cumulative defaults in the pool.  Nonetheless, excess spread is released semi-annually if not used. On the last payment date, RM3.6 million of excess spread was trapped in the liquidity reserve account following a default in interest payment by an obligor, bringing the balance of the liquidity reserve account to RM16.6 million as at September 2006. The ability of the portfolio manager to monitor the collateral and to take timely action in relation to credit impairment events, particularly when corporate credit quality falls below ‘BBB’, remains a significant rating consideration.
MARC will continue to monitor and review this transaction for future rating adjustments.