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RAM Ratings assigns AA1/Stable ratings to Asian Finance Bank’s Structured Covered Sukuk

IM Insights
By IM Insights
2 years ago
RAM Ratings assigns AA1/Stable ratings to Asian Finance Bank’s Structured Covered Sukuk

Murabahah, Sukuk, Reserves

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  1. Media Release RAM Ratings assigns AA1 /Stable ratings to Asian Finance Bank’s Structured Covered Sukuk RAM Ratings has assigned AA1 ratings to all four tranches of the Structured Covered Sukuk issued by Asian Finance Bank Berhad (AFB or the Bank) under the Bank’s RM2,295 million Structured Covered Sukuk Murabahah Programme; all the ratings have a stable outlook. Structured Covered Sukuk Issue Size (RM million) Rating/Outlook Tranche 1 215 AA1/Stable Overcollateralisation ratio (%) as at end-December 2017 102.85 Tranche 2 505 AA1/Stable 42.63 Tranche 3 765 AA1/Stable 60.70 Tranche 4 810 AA1/Stable 56.71 The Structured Covered Sukuk to be issued by AFB are intended for exchange with the corresponding structured covered sukuk tranches issued earlier by Malaysia Building Society Berhad (MBSB or the Company), as part of the merger between AFB and MBSB. The outstanding MBSB Structured Covered Sukuk will be cancelled on completion of the exchange. We note that the exchange is mainly to transfer MBSB’s financial obligations under the sukuk to AFB; all the maturity dates, profit rates and compensation terms remain unchanged. The portfolio of personal financing receivables secured against each tranche, together with the cash balances in the respective designated accounts, also remain the same. RAM expects to withdraw the ratings of MBSB’s Structured Covered Sukuk once the exchange is completed on 2 April 2018. Post-merger, MBSB’s Islamic assets and liabilities will be transferred to AFB to form a larger Islamic bank. Under the new corporate structure, MBSB will emerge as a bank-holding company and continue to maintain its role as the salary-deduction provider. On completion of the sukuk exchange, MBSB will also transfer its investment in the SPV Sukuk Murabahah issued by Jana Kapital Sdn Bhd (the SPV or the Guarantor) to the Bank. Concurrently, the SPV’s unconditional and irrevocable guarantee on the payment of the MBSB Structured Covered Sukuk will be transferred to the AFB Structured Covered Sukuk, thereby maintaining the dual-recourse feature. Sukuk holders have direct recourse to AFB as senior unsecured creditors. If the Bank
  2. defaults , they will then have recourse to the respective tranche Cover Assets through the Covered Sukuk Guarantee. The four-notch rating uplift from AFB’s long-term A2/Stable financial institution rating (FIR) is in line with the maximum rating uplift achievable under RAM’s rating methodology for covered bonds, given the “average” I-Risk of the transaction. Based on our review of the transaction’s legal documents and interaction with AFB’s management team, we opine that the integrity of the overall structure will remain intact. Nonetheless, there may be some minor disruptions to portfolio servicing as the entities undergo operational integration. We believe the necessary legal and operational arrangements are in place to ensure continued servicing of the underlying portfolio, even if MBSB or AFB were to default. The transaction’s liquidity reserves should also adequately address any potential interruption when the cashflow switches from the Issuer to the AFB Tranche Cover Assets. AFB’s FIR considers the credit fundamentals of the Bank’s enlarged balance sheet after the injection of MBSB’s Islamic assets and liabilities into AFB on 2 April 2018 as well as our expectation of ready support from its ultimate shareholder, the Employees Provident Fund. Post-merger, the Bank’s asset quality is anticipated to be better than MBSB’s prior to the merger, as a substantial part of MBSB’s existing impaired financing will remain with it at the holding company level. AFB’s capitalisation is also expected to remain sound – MBSB’s common equity tier-1 and total capital ratios stood at a respective 16.8% and 17.9% as at end-December 2017. By virtue of AFB’s banking licence, MBSB will be able to access new funding sources previously unavailable to it such as low-cost current account deposits and interbank funding. That said, the Group will require time to build up and diversify its depositor base and business franchise. To date, all four portfolios securing the Structured Covered Sukuk tranches have performed better than RAM’s base-case loss assumptions. Prepayment behaviour has also been broadly consistent across the portfolios, hovering close to RAM’s projected rate of high monthly prepayments. The prepayment trend of the Tranche 4 Cover Assets is, however, significantly lower, although still within RAM’s stressed prepayment range. All said, the securitised assets provide ample collateral support for the AFB Tranche Covered Sukuk under an AA1 stress scenario with robust overcollateralisation ratios. Analytical contact Chin Jin Han (603) 7628 1168 jinhan@ram.com.my Media contact
  3. Media Release Padthma Subbiah (603) 7628 1162 padthma@ram.com.my Date of release: 30 March 2018 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. RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications. Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant. Published by RAM Rating Services Berhad  Copyright 2018 by RAM Rating Services Berhad