Published on 22 Sep 2021.
RAM Ratings has assigned respective preliminary ratings of A1/Stable and A3/Stable to the RM17 mil Senior Class A and RM1 mil Senior Class B Notes (collectively, First Tranche MTN) to be issued by Salvare Assets Bhd’s (Salvare or Issuer) under a 10-year RM300 mil Medium-Term Notes (MTN) programme.
The First Tranche MTN will be secured against individual and micro, small and medium sized enterprise (MSME) receivables originated by Axiata Digital Capital Sdn Bhd (ADC), made up of a portfolio of products – Invoice Financing (24%), Supply Chain Financing (38%), Capital X (17%), Aspirasi Capital (6%) and Aspirasi Capital Plus (15%) – at closing. The assigned ratings reflect timely payment of debt obligations by their maturity date. This is the first rated microfinancing securitisation by a fintech company in Malaysia that is only in its third year of operations.
The ratings are premised on the credit enhancement for Senior Class A and Senior Class B at closing, seen in their respective overcollateralisation ratios of 36.50% and 28.91%. These buffers are adequate to withstand potential defaults/cashflow losses in the receivables under stressed levels that are commensurate with the respective ratings. As the transaction allows for purchases of new receivables during the 15-month Revolving Period, the level of credit enhancements are expected to vary over time, in accordance with the composition of receivables required by Salvare. New purchases during the Revolving Period will similarly be based on the predetermined cash purchase price (CPP) formula for each receivables type. The balance of purchase consideration for new receivables will be met via issuance of new Junior Notes and/or redeemable preference shares by Salvare.
Given the revolving feature of the transaction, triggers have been embedded to cease purchases and prioritise all cash collections to sequentially pay senior expenses and if possible, redeem the Senior MTN on a quarterly basis, during the Rapid Amortisation Period (RAP). These trigger events include the portfolio’s cumulative default rate exceeding 6% and two-month moving average collection rate dropping below 90%.
The transaction structure also includes a 15-month Controlled Amortisation Period (CAP), which starts after the 15-month Revolving Period, during which new purchases will stop and all cash collections will be trapped to pay senior expenses and to redeem the Senior MTN on maturity. The Issuer has the option to early redeem the Senior MTN during the CAP if there is sufficient cash to do so after accounting for prepayment premiums and relevant senior expenses.
RAM’s assessment focuses on the required “advance rate” for each receivable type, expressed via the CPP formula. Our cash flow analysis also checks the adequacy of cash flow from the receivables portfolio in meeting senior expenses, coupons and principal redemption of the rated MTN under various stress scenarios.
As ADC has a relatively short track record, having commenced operations only in 2018, the transaction includes a backup servicer at closing. This alleviates concerns over ADC’s servicing capabilities as the transition to the backup is expected to be smooth, with minimal impact on collections. ADC’s constant efforts to improve underwriting criteria to achieve a better facility utilisation rate, may come at the expense of credit quality, more so in the increasingly competitive landscape. The short operating history/data also limited RAM’s assessment of the receivables in arriving at the various stressed scenarios for the targeted ratings. As such, the portfolio’s performance may deviate from past trends.
As ADC operates in a nascent industry, new regulations such as caps on interest rates, additional capital requirements and/or further monitoring by relevant regulatory bodies may be imposed at a later date, especially when the segment starts to contribute meaningfully to the overall market
Salvare is a trust-owned, special-purpose vehicle incorporated to undertake the issuance of MTN to facilitate the purchase of eligible receivables from ADC. In July 2021, Axiata Digital Services Sdn Bhd (ADS) unified its fintech services under the Boost brand, including ADC (currently known as Boost Credit) which houses the micro-financing and micro-insurance businesses. As the fintech arm of ADS, Boost’s financial services span across payments, Artificial Intelligence-based alternative financing, digital insurance, cross-border content services and merchant solutions.
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Ratings on Salvare Assets Berhad