Published on 11 Feb 2020.
RAM Ratings has downgraded the rating of Cendana Sejati Sdn Bhd’s (the Issuer) RM360 million Senior Sukuk Murabahah MTN Programme (Senior Sukuk Programme) to C3 from C1 while maintaining the negative outlook on the rating. The downgrade reflects the imminent default on profit obligations under the transaction in October 2020, given the rundown of available cash balances and in the absence of any material developments to address depleted cashflow collections or inject new capital. The transaction is backed by consumer receivables generated by credit sales to civil servants and serviced through scheduled salary deductions, for the purchase of products originated by Masraf Al Barakah Sdn Bhd (Masraf).
Based on the available information, RAM notes that monthly collections from the portfolio of receivables have remained unchanged since January 2017, with only about 4% of expected monthly scheduled instalments collected. The markedly reduced monthly collections followed strict enforcement of the 60% maximum net salary deduction limit (or 80% for borrowers receiving government housing financing) by the Accountant General’s Department – the primary agency administering the salaries of civil servants. Furthermore, monthly collections by the transaction’s collection agent, Coshare Holdings Berhad (Coshare) – a related party – have not been remitted to the Issuer’s Collection Account since January 2019, as required under the servicing agreement. The delay is due to the reconciliation of over-the-counter collections. Based on the last available disclosures on monthly remittances, we estimate that Coshare currently holds approximately RM395,857 of collections made from January until November 2019. These collections are expected to be fully reconciled by Coshare by end-February 2020 and remitted to the Issuer’s Collection Account by end-April 2020. We highlight that information from Masraf – as the appointed Servicer under the transaction – has generally been limited and not timely.
Meanwhile, Masraf’s efforts to improve collections through over-the-counter payments or early settlement of delinquent receivables have had limited success. Its earlier sukuk restructuring proposals to originate and inject shorter-tenure receivables, and/or provide capital injections via the issuance of additional Junior Sukuk or subordinated advances, or to purchase and cancel the outstanding Senior Sukuk have also not seen any significant or material progress with the sukuk holders to date.
Given the severity of the asset impairment that has affected the liquidity position of the transaction, Cendana is expected to deplete funds in the designated accounts and default on the Senior Sukuk’s profit obligations in October 2020, in the absence of any form of external financial support. Furthermore, the transaction is unlikely to meet the minimum required amount in the Liquidity Reserve Account from May 2020 onwards, if funds currently held by Coshare are not remitted to the Issuer’s designated accounts, breaching the terms of the servicing agreement. We will continue to monitor these developments and make the necessary rating announcement, if any, when more information becomes available.
Lim Chern Yit
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Ratings on Cendana Sejati Sdn Bhd