RAM Ratings has assigned a final rating of AA1 with a positive Rating Watch to Malaysia Building Society Berhad’s (MBSB) MYR 700 million Tranche 2 Structured Covered Sukuk (Tranche 2 Sukuk). The Tranche 2 Sukuk represents the second issuance under MBSB’s RM3 billion Structured Covered Sukuk Commodity Murabahah Programme. The transaction may be considered a form of covered bond as the sukuk holders have dual recourse, first to the issuer (when solvent), and then to a pool of securitised assets (upon the issuer’s default).
The AA1 rating is notched up from MBSB’s long-term A2 financial institution rating and reflects the quality of the securitised assets as well as the supporting securitisation structure. The positive Rating Watch mirrors our view that the merged entities’ credit profile will commensurate with the highest ratings on RAM’s national scale if the proposed merger of CIMB Islamic Bank Berhad (rated AAA/Stable/P1 by RAM), RHB Islamic Bank Berhad (rated AA2/-/P1/RW_Positive by RAM) and MBSB to form a mega Islamic bank materialises.
RAM highlights that the transaction benefits from a portfolio of cover assets (Tranche Cover Assets) comprising personal-financing receivables, via a guarantee extended by Jana Kapital Sdn Bhd. The underlying collateral is viewed to be of good quality given the non-discretionary direct salary deductions for repayment, which help minimise exposure to the borrowers’ credit risks. Any change in MBSB’s long-term rating, the interruption-risk (“I-risk” – as defined in RAM’s Approach on Analysis of Covered Bonds) or the overcollateralisation (OC) ratio may lead to a change in the Structured Covered Sukuk’s rating.
Based on RAM’s cashflow assessment, the available OC of 17.9 per cent provides sufficient protection against the risks of default and prepayment while allowing timely payment of the profit and principal obligations on the Tranche 2 Sukuk under an “AA1” stressed scenario. Liquidity risk is substantially mitigated as the Tranche Cover Assets are near-static, with the Tranche 2 Sukuk’s redemption schedule matched against the securitised assets’ expected cashflow under stressed conditions.
This reduces exposure to market risk, particularly in a nascent covered-bond market where a sufficiently liquid and transparent market for the secondary trading of financial assets has yet to be established. While the transaction’s I-Risk is currently considered “average”, RAM Ratings highlights that there could be changes after the merger that could affect the Sukuk holders’ timely access to the Cover Assets upon the issuer’s default. RAM will look out for any potential implications that may arise following the merger and reassess the I-Risk upon further clarity.
The transaction is exposed to some degree of commingling and clawback risks as salary deductions for repayment are first deposited into MBSB’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 MBSB becomes bankrupt or goes into liquidation.
That said, we believe these risks are remote and moderated by the cash reserve account to bridge any cashflow interruption during the interim period, when the cashflow switches from the issuer to the Tranche Cover Assets. This reserve threshold will increase if the rating drops to BBB3 or lower. To protect the interests of the Sukuk holders, the transaction includes an asset coverage test (ACT) to ensure that the OC is maintained at the minimum level of 17.9 per cent as well as various Stop-Issuance Triggers to stop further issuance. A breach of the ACT that is not remedied within six months will constitute an issuer event of default.
Originally published on www.cpifinancial.net