MARC has downgraded the long term ratings of Kerisma Berhad’s (Kerisma) RM870.0 million senior secured bonds and RM30.0 million mezzanine bonds from AA- to BBB and from A- to BB- respectively, and affirmed the RM100.0 million subordinated bonds at C. The ratings are now placed on MARCWatch Negative. The lowered ratings are premised on the weakened collateral performance reflected by a continuing deterioration in the portfolio’s weighted average rating factor (WARF) to 10.96 (August 2008: 8.73) arising from four obligors downgrades.

Kerisma is a bankruptcy remote special-purpose company, established for the purpose of implementing and carrying out the primary collateralized loan obligation (CLO) programme. At closing of the transaction in June 2004, the originator, Alliance Investment Bank Bhd, transferred 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.

As at to date, the bonds are backed by RM870.0 million performing loans from 22 obligors and liquidity reserve of RM44.9 million. Since the last review in August 2008, three obligors with a total loan exposure of RM130.0 million have been downgraded to below BBB while the fourth obligor with a CLO loan of RM50.0 million by one notch to BBB+. The downgrades were premised on further deterioration in their financial metrics and tight liquidity position thus raising concerns on these obligors’ repayment capabilities for the Kerisma loan. MARC has been informed that one of the downgraded obligors has procured funding to refinance its obligation under Kerisma, while two downgraded obligors with a total CLO loan of RM77.0 million have informed of their proposal to Kerisma’s bondholders’ to reschedule their repayment of the loan over the next four years. Following the downgrades, 9 obligors or 42.5% (by loan amount) of the underlying portfolio are rated at the BBB band and below.

On March 19, 2009, the bondholders had consented for a partial or full prepayment by all obligors on their respective Kerisma loan provided it is prepaid at least two weeks from the facilities maturity date of 1 June 2009. Additionally, the future interest payable on the prepaid amount would be waived. As at to date, six obligors have made partial prepayment totalling RM95.5 million while two obligors have made full prepayment totalling RM70.0 million.

Excluding the three defaulted loans, the portfolio’s WARF deteriorated to 10.96 translating to a weighted average rating of BBB+/BBB. Based on the revised default rates at the respective rating levels, MARC’s cash flow runs indicated that the senior bonds and mezzanine bonds are able to withstand the stresses at the BBB and BB- rating levels respectively. As at to date, the credit enhancement of the senior and mezzanine bonds stood at 5.1% and 1.6% respectively indicating its ability to withstand losses up to approximately RM45.0 million and RM15.0 million respectively. To date, there have been no recoveries of defaulted loans and MARC does not anticipate recoveries prior to the final redemption of the bonds.

The MARCWatch Negative placement reflects the low credit enhancement available and heightened risk of non-timely payment by two of the downgraded obligors in view of its restricted liquidity position. MARC will continue to monitor the performance of the transaction closely to ensure that our ratings on Kerisma remain consistent with available credit enhancement.

Contacts:
Nadia Edmaz Abdul Hadi, 03-2090 2262/ nadia@marc.com.my;
Azlina Mohamed Noor Beg, 03-2090 2254/ azlina@marc.com.my