MARC has affirmed its ratings of A+ and A on special purpose vehicle RCE Advance Sdn Bhd’s (RCEA) outstanding RM15 million Class A and RM20 million Class B notes respectively under the RM420 million Fixed Rate Medium-Term Notes (MTN) Programme. Concurrently, the rating on the outstanding RM40 million Class C notes under the same programme has been lowered to BBB from BBB+. The outlook on the ratings has been revised to stable from negative.

The affirmed ratings on the Class A and Class B notes are primarily driven by their strong collateral coverage levels, stemming from RCEA’s six collateral pools consisting of identified eligible receivables (IER). As at September 30, 2015, the over-collateralisation ratios on the Class A and Class B notes stood at 290.4% and 190.4% respectively based on the collaterals’ total outstanding balance of RM64.8 million and RCEA’s designated accounts balances of RM22.3 million. The collateral coverage strength has largely offset the weakened credit profile of its parent RCE Marketing Sdn Bhd (RCEM) from which RCEA had acquired the six collateral pools. RCEM provides personal financing mainly through tie-ups with cooperatives.

MARC has lowered the corporate credit rating (CCR) on RCEM to BBB+/stable from A-/negative taking into account the company’s subdued earnings performance, weakening liquidity buffer and increasing margin pressures given the competitive operating environment. The Class C notes are rated one notch below RCEM’s CCR to reflect the rating agency’s view that the risk profile of the notes is aligned with the credit profile of the ultimate parent RCE Capital Berhad (RCE Capital) which has given an irrevocable corporate guarantee on the transaction. The rating on Class C notes also reflects its subordination to Class A and Class B notes in respect of security and payment priority. The ratings on all notes also incorporate the undertaking from RCEM to replace defaulted and prepaid IER and/or provide funds to maintain a three-month coverage ratio of at least 1.66 times on the collateral backing the notes.

For the period under review (October 1, 2014 – September 30, 2015), RCEA’s actual collections from the collateral pools were RM14.7 million, lower than projected collections of RM15.2 million. The shortfall was mainly due to transferring loan receivables from the collateral pools to the parent RCEM after meeting the three-month collateral coverage requirement and in-house refinancing. The pools’ average monthly delinquency and default rates for the period under review remained sound at 0.01% and 0.36% respectively given the fact that the IERs are from government servants whose direct monthly salary deductions through Angkatan Koperasi Kebangsaan Malaysia Berhad support the pool’s performance.

MARC notes that the designated account balances cover only 55.8% of the principal redemptions of Class A and Class B notes of RM40 million for the period between October 1, 2015 and September 30, 2016, although the liquidity risk is mitigated by RCEA’s ability to dispose the collateral assets via security trustee.

For the financial year ended March 31, 2015 (FY2015), RCEM’s net interest income grew by 6.3% to RM95.6 million (FY2014: RM89.9 million), reflecting the growth of the personal loan industry. While the company’s net interest margin and cost-income ratio improved to 8.27% (FY2014: 7.08%) in the year under review, they remained lower than pre-2013 levels. RCEM’s personal loan growth is expected to remain subdued due to weak consumer sentiment following the implementation of the Goods and Services Tax.

RCEM’s liquidity position as reflected by cash and cash equivalents decreased sharply to RM37.4 million after funding its loan book (FY2014: RM280.4 million). Coupled with the additional total borrowings of RM44.6 million, RCEM’s net debt was higher at RM573.1 million (FY2014: RM285.4 million). Of some concern to the rating agency is RCEM’s declining unencumbered loan receivables (FY2015: RM150 million; FY2014: RM200 million) which could weigh on the company’s ability to support its undertaking provided to RCEA under this transaction.

The stable outlook reflects MARC’s expectations that the collateral pools will remain in compliance with the coverage requirement and RCEM will maintain its business and financial risk profiles that are commensurate with the current rating band.

Contacts:
Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.