(Text released by the ratings agency)
KUALA LUMPUR, April 16 - Malaysia’s RAM Ratings has reaffirmed the AAA rating of Cagamas MBS Berhad’s 2.11 billion ringgit ($691.10 million) Islamic residential mortgage-backed securities (RMBS), i.e. CMBS 2007-1-i, with a stable outlook.
The reaffirmation is premised on the available over-collateralisation (OC) ratio of 28.14 percent (as at the reporting date of Nov 29, 2011), supported by the overall performance of the collateral pool, and the credit enhancement afforded by the transaction structure. The stable outlook reflects RAM Ratings’ opinion that the trends in defaults and losses, as well as prepayments on the government staff Islamic home financing facilities (GSIHFs), will continue to fall within our expectations.
The OC ratio is calculated against 2.03 billion ringgit of outstanding GSIHFs and 246.69 million ringgit of cash and permitted investments. This level of OC provides sufficient protection against the risk of prepayment, negative variance of investment returns and defaults under an “AAA” stressed scenario.
As at July 31, 2011, the portfolio of GSIHFs comprised 24,696 accounts, with an average outstanding balance of 82,367 ringgit per account; the portfolio’s weighted-average remaining term came up to 16.76 years. As at the same date, the cumulative net default rate for the underlying financing portfolio stood at 0.43 percent, as a percentage of the principal balance on the purchase date - this is well below RAM Ratings’ base-case assumption.
While the cumulative prepayment rate on the underlying GSIHFs stood at 3.85 percent, i.e. lower than RAM Ratings’ base-case assumption, prepayments in the last 2 years have been hovering at higher levels than the initial years. We expect prepayments to pick up as the pool becomes more seasoned through time.
More recently, it was announced that civil servants under the revised Malaysian Remuneration System (Sistem Saraan Malaysia) will receive 7 percent-13 percent salary increments, expected to be paid out sometime in April 2012. However, given that the profit rates on the GSIHFs are below current market levels and mounting concerns over the rising cost of living, RAM Ratings expects the salary adjustment to cause minimal spikes in prepayment levels.
As highlighted in our last review, a lower-than-assumed prepayment rate - albeit with no material impact on the transaction’s rating at this juncture - exposes the transaction to higher liquidity risk. On this front, RAM Ratings will maintain close monitoring of this transaction to ensure that its rating reflects the overall credit quality of the collateral pool and the credit support afforded by the structure.
Based on the closing cash balance of 246.69 million ringgit (inclusive of permitted investments) as at Nov 29, 2011 and an expected monthly net cash inflow of approximately 10 million ringgit, we expect the transaction to accumulate sufficient funds by May 29, 2012 to redeem the 255 million ringgit Tranche 2 RMBS falling due. Upon full redemption of Tranche 2, 1.525 billion ringgit of the RMBS (i.e. Tranches 3 to 7) will remain outstanding.
$1 = 3.0531 Malaysian ringgit Reuters