RAM Ratings Assigns AA1 Rating To Masraf Al Barakah’s Senior Sukuk

UAE– “This Senior Sukuk will be issued together with Cendana’s Junior Sukuk Murabahah MTN, to fund the purchase of consumer receivables originated by parent company, Masraf Al Barakah Sdn Bhd. These consumer receivables are generated by credit sales to civil employees for the purchase of products (Credit Sales Receivables). The source of repayment for the Senior Sukuk will be collections made by Coshare Holdings Berhad – a related company of Cendana – through its automatic salary deduction mechanism.

“The Masraf Group is principally involved in credit sales to civil employees for the purchase of products in which the payment collection is automatically deducted from their salaries. Its key subsidiaries are involved in the origination, distribution, collection and product brokerage services of Credit Sales Receivables. To date, however, the Group’s track record is largely centred on administering/distributing these deferred-payment products, rather than credit origination.

“The rating of the Senior Sukuk is supported by credit enhancement in the form of collateralisation of receivables, of at least 1.73 times. This level of collateralisation acts as a buffer against potential cashflow loss due to default, commingling and dilution events under an “AA1” stressed scenario. It also takes into account the potential cashflow loss from the receivables that may fall outside the Senior Sukuk’s tenure. Meanwhile, the transaction is also supported by structural features, including triggers that preclude the issuance of Sukuk for further purchase of receivables upon deterioration of the transaction. Overall, Cendana’s exposure to the customers’ credit risks is deemed low as payments are non-discretionary and come next in line after statutory deductions. Furthermore, receivables purchased under the Senior Sukuk must meet certain eligibility criteria.

“The uncertain debt-maturity profile of the Senior Sukuk, despite the amortising programme limit, may expose the transaction to liquidity risk. To partly mitigate this, Cendana must progressively build up an amount equivalent to the next principal and/or profit payment due. In addition, covenants such as restrictions on excessive profit payments on the Junior Sukuk, payment “stoppers” (e.g. breach of the liquidity threshold for the designated account) and a minimum post-distribution finance service coverage ratio are in place to minimise cashflow leakage.

“We further highlight that our portfolio analysis is constrained by the relative short seasoning of only one year plus versus financing tenures of up to 10 years. Nonetheless, we also note that defaults in such financing to government employees are not typically driven by the customers’ credit profiles, but by specific circumstances such as employees’ resignation, termination of service and incidences of no-pay leave. At the same time, we acknowledge the tighter credit environment following the announcement of Bank Negara Malaysia’s guidelines on responsible lending. In this respect, we anticipate prepayments to be minimal and primarily driven by salary increments rather than refinancing.

“In the meantime, there could be potential interruption of remittances and some commingling risk. Salary deductions for repayment are first deposited into Coshare’s account, before being segregated and transferred to the designated account for the transaction. While the Sukuk holders have security over the securitised assets, their access to these assets may be frustrated in the event Coshare becomes bankrupt or goes into liquidation. RAM, however, derives comfort from the knowledge that Coshare merely holds the salary deductions in trust for the lenders. We also believe that Coshare has minimal bankruptcy/liquidation risk as its business scope is restricted by its memorandum and articles of association to only the provision of salary-deduction services through the Accountant General. The final rating is subject to RAM’s review of the transaction’s full documentation, including the receipt of legal opinions on the enforceability of the documents, and legal assignment and sale of the assets.”

Originally published on www.cpifinancial.net