Published on 19 Jun 2020.
RAM Ratings has upgraded from AA1 to AAA the rating of Tranche 1 Structured Covered Sukuk issued by MBSB Bank Berhad (MBSB Bank or the Bank) under its RM2,295 million Structured Covered Sukuk Murabahah Programme. Concurrently, we have reaffirmed the AA1 rating of Tranche 2 to 4 of the same programme. All the ratings carry a stable outlook. The Structured Covered Sukuk is a dual-recourse sukuk instrument with direct recourse to MBSB Bank as a senior unsecured obligation upon default, as well as to the relevant Tranche Cover Assets comprising personal financing facilities for civil servants originated by MBSB Bank.
Structured Covered Sukuk
Overcollateralisation ratio (%) as at end-December 2019
The upgrade of Tranche 1 is premised on its fully cash-collateralised position under its second recourse. As such, the ability of the transaction to meet Tranche 1 Sukuk obligations in the event of the Bank’s default will no longer depend on future collections of the Tranche Cover Assets, thus lifting the rating limit of four notches above MBSB Bank’s long-term financial institution rating (FIR) of A2/Stable, given the transaction’s “average” interruption risk (I-risk, refer to “RAM’s Approach to Analysis of Covered Bonds ).
Meanwhile, the reaffirmation of the ratings of Tranche 2 to 4 reflects the Bank’s FIRs, the transaction’s “average” I-Risk, and the superior credit support accorded by an overcollateralisation level that corresponds with an “AA1 stress” rating scenario. While the cover assets for these tranches provide more than sufficient credit enhancement to support their ratings, the transactions are limited by the four-notch rating uplift from the Bank’s long-term ratings under RAM’s rating criteria for Covered Bonds.
Overall, the Bank’s ratings are based on its sturdy loan loss coverage ratio and healthy pre-provision profit, which are anticipated to sufficiently cushion potential increases in impairment charges amid the highly challenging operating environment. MBSB Bank’s capitalisation is deemed resilient and is expected to stay healthy throughout the economic downturn from the Covid-19 pandemic. The Bank’s rating also incorporates anticipated backing from its ultimate largest shareholder, the Employees Provident Fund (EPF). Click here for further information.
During the review period, all four Tranche Cover Assets continued to perform better than RAM’s base-case loss assumptions, providing an adequate buffer to absorb higher incidences of default. The recently announced six-month automatic moratorium (effective 1 April 2020) on debt repayments, as part of Bank Negara Malaysia’s economic relief package in response to the pandemic, applies to personal financing which constitutes the securitised assets of the four tranches. Based on RAM’s sensitivity, all four transactions still have sufficient liquidity to fulfil payment obligations and meet the stress scenarios that their current ratings entail. Although the mandatory deferment of loan payments will not increase the default rate during the moratorium period, we do not rule out a possible uptick in delinquencies due to administrative delays in resuming salary deductions.
Save for Tranche 4 Cover Assets which demonstrated low levels of prepayment, the prepayment rate of the three other tranches has trended higher than our high-prepayment assumptions. The higher prepayments are, however, partly moderated by the serial redemption of the sukuk and better than expected default performances to date. All things considered, the securitised assets provide ample collateral support for MBSB Bank’s Structured Covered Sukuk under the stress scenarios of their current ratings.
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The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
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