Tuesday, January 4, 2011

RAM Ratings reaffirms ratings of Blondal RM70m debt notes

KUALA LUMPUR: RAM Rating Services Bhd has reaffirmed the ratings of Blondal Resources Sdn Bhd's (BRSB) RM70 million debt notes.

The ratings agency said on Tuesday, Jan 4 BRSB was set up to securitise the hire-purchase receivables of Blondal Sdn Bhd's subsidiary Primuda Sdn Bhd.

RAM Ratings said it had reaffirmed the respective short- and long-term ratings of P1 and A1 for Blondal Resources Sdn Bhd's RM70 million commercial papers and medium term notes (CP/MTN) programme; the long-term rating has a stable outlook.

Below is the statement issued by RAM Ratings

The reaffirmation of the ratings is premised on the overcollateralisation (OC) levels of the CP/MTN. On Dec 21, 2010, approval was given by the CP/MTN holders to allow Blondal to remove some of the securitised receivables in the portfolio so long as a minimum OC of 180% is maintained.

This resolution is not seen to have a material impact on the transaction as the current level of collateral (end-August 2010: 217%) is much higher than necessary; the minimum OC of 180% already provides sufficient protection against the risk of our revised higher-base default and repossession assumptions under an A1 stress scenario for the CP/MTN.

As at end-August 2010, BRSB had RM11 million of outstanding CP, supported by a RM20.88 million pool of outstanding HP receivables (the Portfolio); this resulted in a collateralisation level of 117%.

The portfolio's monthly gross default rate averaged at 0.71% for the first 8 months of 2010, compared to the high of 1.10% at the peak of the recent global economic crisis. Nonetheless, the cumulative net default rate of the portfolio had peaked at 6.5%, against our base-case assumption of 2.75%.

The higher-than-expected defaults were also consistent with our observation of Blondal's historical HP loans originated between May 2001 and December 2009.

Based on our assessment of the performance of these 104 static pools, we note a much higher level of defaults compared to its older loan pools reviewed during our initial rating in 2006.

Taking all these into consideration, we have revised our base-case peak cumulative net default rate, from 2.75% to 5.5%. As such, a higher OC level is required to provide protection against the Portfolio's higher net default levels and slower repossessions (12.58%, i.e. below our base-case assumption of 21.88% as at 31 August 2010).

RAM Ratings believes that the higher default rates may - to a large extent ' be a result of the change in the Portfolio's HP composition, which now comprises receivables generated from smaller household items with shorter financing tenures.

These new loans, which have replaced the defaulted loans in the Portfolio, may have a different profile from the initial historical static pools that had consisted of loans for larger and more expensive products with longer financing periods. Up to end-August 2010, Blondal had replaced the RM11.66 million of 'losses arising from defaults and repossession' with RM12.14 million of new receivables.

The replacement of these accounts, as required under the transaction, relies on Blondal's ability to generate sufficient new sales and originate HP loans to keep up with the replacement cycle. Failure to replace these receivables is tantamount to an early amortisation event.

While Blondal has provided an irrevocable corporate guarantee on all amounts due and payable under the CP/MTN, RAM Ratings has not placed any weight on the guarantee. Nonetheless, we highlight that the higher OC level and reliance on Blondal's replacement are only necessary should defaults rise above present levels. In this respect, the sustainability of the OC levels depends on Blondal's business continuity and HP loan origination.

Although we derive some comfort from Blondal's 37-year operating track record, its liquidity position is very tight as it relies on short-term debt to fund its working capital while the cashflow from its HP loans span 1-3 years. In this respect, we will also continue to monitor Blondal's business, i.e. sales and HP origination, as well as its financial position.

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