STRUCTURED FINANCE RATINGS. CAGAMAS MBS BERHAD New Issue. Amount (RM million) Rating Assigned

Transcription

1 STRUCTURED FINANCE RATINGS RATING AGENCY MALAYSIA BERHAD (Incorporated in Malaysia under Companies Act. 1965) Co. No U OCTOBER 2004 Analysts: Khoo Boo Hock (603) Chris Ngooi (603) Siew Suet Ming (603) Security: i) Debenture creating a first fixed charge over the portfolio of mortgages and related security. ii) Legal assignment and charge over the Collections Account and money standing to the credit in that account. iii) Legal assignment of all of the Issuer s rights, titles and benefits in respect of the mortgage loans under the Purchase Contract, any collateral or security related to the payment of these contracts, and insurance policies maintained in respect of the same contracts. iv) Legal assignment of all the present and future rights, benefits, interests and titles under the Transaction Documents, created in favour of the Security Agent. CAGAMAS MBS BERHAD New Issue! Issue Details Bonds Rating Assigned Amount (RM million) Coupon Rate (%) Legal Final Maturity Class A AAA RM1,555.0 Series 1 RM % 20 October 2007 Series 2 RM % 20 October 2009 Series 3 RM % 20 October 2011 Series 4 RM % 20 October 2014 Key Transaction Parties Issuer Originator/Servicer Transaction Administrator/Administrator Insurers Principal Advisor/Lead Arranger/Facility Agent Financial Advisor Legal Counsel Reporting Accountant Tax Advisor/Tax Agent Joint Lead Managers Bond/Security Trustee Government of Malaysia Cagamas Berhad (rated AAA/P1with a stable outlook) Malaysian National Insurance Berhad and Takaful Nasional Sdn Bhd Aseambankers Malaysia Berhad Bumiwerks Capital Management Sdn Bhd Messrs Wong & Partners (for the Issuer) and Messrs Zaid Ibrahim & Co (for the Principal Advisor/Lead Arranger and the Joint Lead Managers) PricewaterhouseCoopers PricewaterhouseCoopers Taxation Services Sdn Bhd Aseambankers Malaysia Berhad, Commerce International Merchant Bankers Berhad and Standard Chartered Bank Malaysia Berhad Malaysian Trustees Berhad Pool Summary* Collateral Portfolio of GSHLs serviced by pension deductions Portfolio principal balance RM1,935,744, Number of GSHLs 68,396 Average GSHL size RM28, WA remaining term of GSHLs years WA portfolio seasoning years WA interest rate 4.00% WA age of borrowers years GSHL government staff housing loan WA - weighted average *Portfolio of eligible GSHLs as at the cut-off date of 29 February RAM s rating is not a general-purpose evaluation of an issuer, but an assessment of a specific debt issue. Accordingly, a debt issued by a particular issuer may differ in rating from other issues by the same issuer. RAM s 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.

2 ! Rationale First deal of this kind involving Government assets and residential mortgage-backed loans This is the first issuance of debt securities involving the securitisation of government staff housing loans ( GSHLs ) that have been granted to public sector employees by the Government of Malaysia ( GOM ) pursuant to the Akta Kumpulanwang Pinjaman Perumahan, or the Housing Loans Fund Act 1971 (Act 42). The transaction is secured by a static portfolio of GSHLs that are serviced via monthly deductions from the pensions of retired public sector employees, and represents Malaysia s first transaction backed by residential mortgages. ( Cagamas MBS ) a wholly owned subsidiary of Cagamas Berhad ( Cagamas ), the national mortgage corporation is a limitedpurpose entity incorporated to undertake this transaction and future transactions of a similar nature. By virtue of its incorporation documents, Cagamas MBS activities are limited to the purchase of residential mortgages from the GOM, and the issuance of debt securities to fund such purchases. Accordingly, Cagamas MBS intends this transaction to be the first in an ongoing securitisation programme. RAM has assigned a rating of AAA to the RM1,555 million residential mortgagebacked securities ( RMBS" or the Bonds ) to be issued by Cagamas MBS. The rating is based on the quality of the collateral, the originator s underwriting and servicing capabilities, and the integrity of the transaction s legal and payment structures. In RAM s analysis, comfort was drawn from the assurance from Cagamas that future transactions of Cagamas MBS would include non-petition and limited-recourse clauses; cross-collateralisation of security is not expected. RAM has reviewed the transaction documents for the first bond issuance and is of the opinion that it provides adequate protection for the bondholders in terms of cashflow priority and support for the rating assigned, therefore resulting in Cagamas MBS being reasonably removed from any potential insolvency on the part of Cagamas.! Transaction Strengths The repayment of the GSHLs is non-discretionary on the part of the borrower, i.e. payments for the loans are deducted at source, thus reducing exposure to the borrowers creditworthiness. The risk of voluntary prepayment is deemed low, as the interest charged on the GSHLs is a preferential sub-market rate. Furthermore, as both the GSHLs and the Bonds pay fixed interest rates, Cagamas MBS exposure to basis risk is removed. Only GSHLs that are serviced by the monthly pensions of retired public sector employees, and that meet certain stringent criteria, have been 2

3 included in the securitised portfolio. As a result, the risks of this securitised portfolio have been significantly reduced; the main credit hazard for the GSHLs is their exposure to the risk of involuntary prepayments. The transaction benefits from a well-seasoned portfolio of mortgages with a weighted-average seasoning of 14.9 years. This represents more than half of the original term-to-maturity of the GSHLs, thus reducing the loan-to-value ( LTV ) ratio of the mortgages at the close of the transaction. The GOM s lending policies allow maximum original-ltv ratios to exceed 100% as the amounts required for insurance premiums can be funded through the GSHLs, on top of the borrowers housing loan entitlements. Nonetheless, recoveries in the context of the securitised portfolio are determined by the mortgage-reducing-term-assurance ( MRTA ) balance-tooutstanding loan balance ratio. As all eligible GSHLs in the portfolio will be fully insured for the outstanding amounts, prospects for full recovery are very favourable. The strength of the legal framework by statute, pensions may not be attached or sequestered save for amounts due to the GOM and maintenance for a spouse, i.e. the deductions from the borrowers pensions rank as senior obligations; any other creditors must rank after the GOM. Transparent regulatory framework highlighting housing loan entitlements, procedures for recovery, pension benefits, eligibility and pension calculations. The securitised portfolio of RM1,936 million provides a collateralisation ratio of 124% over the Bonds. While this ratio appears high, some of the future cashflow from the GSHLs is not expected to be collected within the Bonds tenure; RAM s analysis did not give any credit to the cashflow beyond the tenure of the Series 4 Bonds, i.e. 10 years. In RAM s opinion, this level of apparent overcollateralisation provides sufficient protection against the risks of prepayment, negative yield spread and liquidity in the transaction under a AAA stressed scenario.! Transaction Concerns and Mitigants The operational and administrative processes of the various Government agencies have, at times, not been prompt vis-à-vis the execution of payment deduction instructions, thus resulting in delayed collections on the GSHLs. However, this is alleviated by the transaction s payment mechanism and the portfolio s eligibility criteria, i.e. to only securitise GSHLs for which deductions have already begun. 3

4 There is insufficient detailed historical data which renders portfolio analysis challenging. Nonetheless, this has been addressed by RAM s stressed prepayment assumptions of between 0% and 2.5% per annum, well above the historical maximum experienced. The transaction is a conditional reverse-pay structure with a limited passthrough feature which allows surplus cashflow to be paid to the outstanding Bonds with the longest maturity, i.e. the Series 4 Bonds maturing in year 10, if the cash balance exceeds RM66 million after the respective scheduled repayments on the Series 1, Series 2 and Series 3 Bonds. This introduces potential liquidity risk to the transaction, particularly during sustained periods of prepayment incidences. Under RAM s simulated prepayment scenarios, there is only a low probability for prepayment of the Series 4 Bonds, with remote risk of liquidity stress. The rating addresses the timely payment of coupons and redemption of the Bonds by their respective legal final maturities. Nonetheless, RAM s rating only addresses the credit risks associated with the transaction and does not reflect the prepayment risks.! Rating Approach THLs inherently different from conventional mortgage loans Asset-specific rating criteria developed The GSHLs originated by the GOM represent a unique class of mortgage loans and are inherently different from commercial mortgage loans. The quality of commercial mortgage loans varies from one portfolio to another, and generally depends on the financier s underwriting standards. Default probability is usually influenced by several factors, including the borrowers debt-to-income ratios as a measure of debt servicing ability, the LTV ratio as a measure of the borrowers invested equity in the property, and/or the degree of the borrowers sensitivity to changes in interest rates. The recovery rates for defaulted loans, meanwhile, are driven by the assumed value of the property under stressed market scenarios. RAM believes that the risk profile of the GSHLs is considerably better compared to those of commercial mortgages. In respect of the securitised pension-serviced GSHLs, the extent of potential loss for the portfolio is tied to the likelihood of these pensions being revoked and the mortality rate of the borrowers/pensioners. Recoveries are determined by the ratio of the MRTA balance against the outstanding loan amount. In rating this transaction, RAM has applied a rating criteria that is specific to pension-serviced GSHLs; this has been developed based on RAM s understanding of the risk profiles of pension-serviced GSHLs. 4

5 ! Transaction Overview! The Issuer Issuer s business activities limited to purchase of residential mortgages from GOM Cagamas MBS is a limited-purpose entity that has been specifically incorporated for the purposes of this transaction and future transactions of a similar nature. By virtue of its incorporation documents, Cagamas MBS activities are limited to the purchase of GSHLs from the GOM and the issuance of debt securities to fund such purchases. Its parent, Cagamas, is the national mortgage corporation that had been established at the initiative of Bank Negara Malaysia, the central bank, to develop the secondary mortgage market in Malaysia. The board of Cagamas MBS includes nominees of Cagamas though no less than a third of Cagamas MBS board will comprise independent directors. As a wholly owned subsidiary of Cagamas, RAM expects the parent to continue exerting some influence over the future business decisions of Cagamas MBS. While this may weaken the argument for impartiality and de-linking of the risks of the parent company, RAM believes that the bondholders interests will be preserved (refer to Legal Issues). In March 2004, RAM affirmed the AAA/P1 ratings (with a stable outlook) for all of Cagamas outstanding unsecured senior debts 1. Transaction will be the first in an ongoing securitisation programme Under the securitisation programme, Cagamas MBS will issue debt securities from time to time to fund the purchase of GSHLs. To facilitate these purchases, Cagamas MBS will execute a Master Sale and Purchase Agreement ( MSPA ) with the GOM. Only GSHLs related to the purchase of residential properties that have been issued certificates of fitness and purchase of land, and loans that have been fully disbursed, and as well as GSHLs where the mortgaged properties have been fully paid for, are eligible under the MSPA ( Core Eligibility Criteria ). In addition, a purchase contract will be effected for each acquisition, incorporating specific terms and conditions that include portfolio-specific eligibility criteria. The GOM will sell the portfolio of GSHLs to Cagamas MBS on a true sale basis, by way of an equitable absolute assignment; the security will only be perfected and the borrowers notified of the sale upon an Event of Default for the respective Bonds. Under the MSPA, the GOM will make certain representations and warranties that the GSHLs sold conform to the Core Eligibility Criteria and portfolio-specific eligibility criteria. If these GSHLs are subsequently found to be non-compliant, the GOM will repurchase the affected loans under the repurchase arrangement. The repurchase of non-compliant GSHLs will be on a deferred-payment basis, with the payment profile for the repurchase consideration mirroring the scheduled monthly instalments due from the borrowers. 1 For further details, please refer to RAM s rating rationale on Cagamas, published in March

6 ! Structure Summary Pension-serviced GSHLs the first portfolio to be securitised At the close of the transaction, Cagamas MBS will issue RM1,555 million of asset-backed securities to fund the purchase of the first portfolio of GSHLs from the GOM. This portfolio comprises GSHLs that are currently being serviced by former public sector employees who have opted for the GOM s pension scheme. The pool of pension-serviced GSHLs had a principal balance of RM1,936 million as at the cut-off date, i.e. 29 February This securitisation has a limited pass-through feature. While the principal repayment schedule is fixed, the transaction allows for prepayment of the outstanding Bonds with the longest-maturity, i.e. the Series 4 Bonds maturing in year 10 if the cash balance exceeds RM66 million after the respective scheduled payments on the Series 1, Series 2 and Series 3 Bonds. Payments collected from the GSHL receivables will be used to meet the tax liabilities in respect of the portfolio, the fees of Cagamas MBS in respect of this transaction, and the coupon and principal payments on the Bonds according to a pre-determined cashflow waterfall; coupon will be paid on a quarterly basis in arrears from the date of issuance. Figure 1: Transaction overview Cagamas (Transaction Administrator/ Administrator) Prepares transaction and servicer reports and performs administrative duties Cagamas (parent company) 100% ownership GOM (Originator/ Servicer) Sale of GSHLs and related security Purchase consideration Cagamas MBS (Issuer) Bonds issued to investors Proceeds from Bonds Investors Class A Bonds GSHLs Servicing assets Provides MRTA and fire insurance coverage for the pledged mortgages Malaysian National Insurance Berhad Takaful Nasional Sdn Bhd Holds security on behalf of the investors Malaysian Trustees Berhad (Bond/Security Trustee) Monthly pension deductions Pensions Division, Public Service Department Insurance providers Veteran Affairs Division, Ministry of Defence Government agencies administrating pension payments 6

7 Clean-up call and mandatory redemption Built into the structure is an optional redemption of the outstanding Bonds (based on a pre-determined formula), when the underlying provisional GSHL pool has been reduced to 10% or less of the original amount. A mandatory redemption will occur on any interest payment date if there is a material breach under the MSPA.! Accounts and Payment Structure Cagamas MBS will open a Collections Account for each GSHL portfolio purchased, to be solely operated by the Security Agent and into which the GOM will deposit payments collected from specific GSHL receivables, on a quarterly basis. Cagamas MBS will also open an Operating Account to capture money not related to the GSHL portfolios purchased. Amounts needed to cover tax liabilities incurred by each purchased portfolio will be transferred from the respective Collections Account into the Operating Account; any surplus funds in the Operating Account may be distributed as dividends to its shareholders. Cagamas MBS can only invest its available cash in permitted investments provided such investments mature no later than 5 business days before the next payment date. Payment allocation prior to Default Event Provided that no Event of Default has occurred, funds in the Collections Account will be applied in the following order of priority: i) Payment of tax liability, in respect of the portfolio, into the Operating Account. ii) Payment of senior expenses, e.g. Trustee, Security Agent, Facility Agent and Rating Agencies fees, to the extent that these fees have not been paid by the Transaction Administrator. iii) Payment of the Servicer fees due on each coupon payment date and other payment as and when due arising from perfection or enforcement of the security. iv) Payment of other senior fees, i.e. Transaction Administrator and Administrator fees on each coupon payment date. v) Coupon payable on the Bonds on their respective payment dates. vi) Scheduled principal payments on the respective legal maturity dates, until full redemption. vii) Principal payments on the outstanding Series 4 Bonds subject to maintaining the RM66 million minimum balance in the Collections Account and giving no less than 30 days or more than 60 days notice of redemption. Post-enforcement waterfall If an Event of Default occurs, the Bonds will be immediately due and payable and all the money in the Collections Account will be applied in the following order of priority: i) Payment of tax liability, in respect of the portfolio, into the Operating Account. ii) Payment of senior expenses, e.g. Trustee, Security Agent, Facility Agent 7

8 and Rating Agencies fees, to the extent that these fees have not been paid by the Transaction Administrator. iii) Payment of the fees incurred in respect of the enforcement of the security and/or the disposal of the portfolio. iv) Payment of Servicer fees. v) Payment of coupons on the Bonds on a pro-rata basis. vi) Pari passu and pro rata redemption of the Bonds until the balance is reduced to zero. vii) Payment to the Transaction Administrator and Administrator. viii) Residual balance to the Issuer. Key Events of Default in relation to the Bonds include failure to pay any amount due under the Bonds, breach of the obligations under the transaction, any change in the nature of the Company s business activity, Cagamas MBS becoming insolvent, and the occurrence of a Servicer Default Event. In RAM s opinion, the insolvency risk of Cagamas MBS as a result of a default on future indebtedness is remote (refer to Legal Issues).! Originator/Servicer and Operations Review In April 2004, RAM met up with the key management from the various Government agencies responsible for administering and managing the GSHLs and the GOM s pension scheme. The meetings covered a review of their operations, with particular reference to the securitisation exercise and understanding the roles of the various parties in this transaction. Overall, RAM found the operations of the various Government agencies to be satisfactory.! Seller/Originator/Servicer Bahagian Pinjaman Perumahan ( BPP ) is a division of the Ministry of Finance and represents the independent administration that is responsible for all matters relating to the approval and disbursement of GSHLs. BPP is empowered under the Housing Loans Fund Act, 1971 (Act 42) to promote home ownership, by providing long-term, fixed-rate financing to public sector employees. As the sole Government agency specialising in mortgages, BPP s operations, including its origination guidelines and processes, are directly driven by the GOM s public policies. As at 31 December 2003, more than RM24 billion in principal balance outstanding approved by BPP remained. 8

9 ! Key Features of GSHLs GSHL approvals revolve around Government policies Principal terms of GSHLs GSHLs represent one of the core benefits extended to public sector employees. All applications may be submitted under either of the 2 schemes offered by BPP: conventional loans under Skim Pinjaman Perumahan Perbendaharaan ( SPPP ) or Islamic financing under Skim Pembiayaan Perumahan Secara Islam ( SPPI ), provided that the proceeds are exclusively used for housing purposes. As long as the applicant is a full time confirmed employee of the GOM having served the GOM for longer than 1 year, is a Malaysian and not bankrupt or under disciplinary action, they have the right to obtain a mortgage loan subject to the application being submitted no later than 6 months before their retirement age, and that the loan amount is not greater than the applicant s maximum entitlement. Each applicant s housing loan entitlement meanwhile, is determined by his or her monthly basic salary at the point of application. As such, the approval process revolves around the guidelines and policies that have been set out to safeguard the interests of the GOM vis-à-vis such loans. All approved loans will have to meet the following criteria 2 : Have a first-priority perfected charge on the collateral property. Not exceed the borrower s housing loan entitlement (before financing for MRTA and fire insurance). Apply a standard fixed interest rate of 4% annually, calculated on a monthlyrest basis. If the borrower leaves the public sector service, a commercial rate of 7% and 9%, respectively, will apply to loans that are less than and greater than RM100,000. Maximum loan tenure of 25 years for applicants on the Government pension scheme, or up to 56 years of age for those that opt for the Employees Provident Fund scheme 3. Beginning LTV can exceed 100% if insurance financing is included BPP s lending policies allow maximum LTV ratios, provided the loan amount is not higher than the applicant s housing loan entitlement. All properties financed, nonetheless, still have to comply with BPP s guidelines. Fire insurance and MRTA (the latter made compulsory only since 1994) and must span the life of the loan, and can be funded through the GSHL. As a result, the beginning-ltv ratio may exceed 100% when the amount required to cover the MRTA and fire insurance is added to the borrower s housing loan entitlement. All loans are insured by Malaysian National Insurance Berhad ( MNI ) or its subsidiary, Takaful Nasional Sdn Bhd ( Takaful Nasional ). The latter is the exclusive insurer for all Islamic financing 4. 2 Joint housing loans and second housing loans (the latter introduced after a policy change in October 1999), must meet certain additional criteria. 3 BPP s lending guidelines also allow for maximum loan tenures of up to 30 years for select purposes though this proportion is very small relative to the total number/value of GSHLs originated. 4 Though MNI and Takaful have a co-insurance arrangement in place, the policyholder has full recourse to MNI and/or Takaful Nasional in respect of their claims. 9

10 All loan origination and collection operations are centralised at the BPP headquarters at Jalan Duta, Kuala Lumpur. As standard documents are required for each loan application, BPP need only verify the application form and the relevant attachments, to ensure that the loans fall within the standard underwriting criteria. Any application that falls outside of these guidelines will be rejected.! Servicing, Arrears Management and Enforcement GSHL repayment directly deducted from payroll or pensions Collections made through various payment agencies or agencies responsible for Government pension payments Clear and transparent regulatory framework that govern GSHLs and pensions Once a mortgage loan is originated, borrowers pay through direct salary or pension deductions. Under the loan agreement, BPP will issue an instruction for deductions to be made from the borrowers monthly salaries while they are still in service (Arahan Potongan Gaji or APG ), or from their monthly pensions upon retirement (Arahan Potongan Pencen or APP ). Typically, the APG will be issued the earlier of the property financed achieving 95% completion or 18 months after the first disbursement of the loan; salary deductions at source will commence and continue until the applicant s retirement or resignation from Government service. Due to the potential timing difference between loan disbursement and actual amortisation of the loan, a compressed interest charge is sometimes added to the borrower s monthly salary/pension deductions; compressed interest is the charge due to the additional interest incurred over the period and is apportioned over the remaining tenure of the loan. The retirees department heads have the responsibility of alerting BPP of their impending retirement so that BPP can execute the APP for a change in the mode of payment for the borrowers who have opted for the GOM s pension scheme. The various Government agencies will transfer payment to BPP via the respective payment agencies responsible for salary payment or the agencies responsible for pensions at the end of each month. Pension payments are administered by 2 Government agencies, i.e. the Pension Division of Jabatan Perkhidmatan Awam ( JPA ) or the Public Service Department and the Veteran Affairs Division in the Ministry of Defence ( MINDEF ) for retired public sector employees and army officers, respectively. Upon receiving the APP, the respective agencies will proceed to deduct the required monthly instalments from the borrowers pensions, before crediting the balance into their bank accounts. By legislation, all matters relating to pension benefits are governed by the relevant pensions law (Act 227 or Act 239) highlighting amongst others, pension entitlements, calculations, and method of payment. Based on RAM s on-site review of the operational procedures at JPA and MINDEF, we believe that the respective paying agents have the necessary systems and experience to support the securitisation exercise. At present, pension deductions made by MINDEF are remitted to BPP via JPA. However, MINDEF will be a direct paying agent to BPP effective January 2005, following the full transfer of the armed forces accounts to MINDEF (the responsibility to administer pension payments to the armed forces employees was reassigned to 10

11 MINDEF following a policy change in 2000); this change in payment mechanism is not deemed to be material. Reminder notice sent after a GSHL is 3 months in arrears Property is enforced only when there is no other available avenue Under the current practice, a notice is sent for any account that is more than 3 months in arrears to remind the borrower to remedy the amount due within 1 month. If no further action is received from the borrower, the account is referred to the legal department and a second notice is issued with another month s grace granted to make good the arrears. Legal action is pursued if the borrower fails to resolve the delinquent account within the grace period. Foreclosure on the property will only be instigated in instances where there is no other avenue for recovery apart from the disposal of the property. Delinquent accounts will still be treated as accounts to be resolved and will usually be settled by adjusting the monthly instalments by either compressing the amortisation schedule within the loan tenure or recovering the amounts in arrears through a double-deduction of salary/pensions, i.e. deducting additional instalment payments due from the monthly salary/pension payments. In the case of retired public sector employees, the amounts in arrears can be deducted from gratuity benefits a lump-sum payment granted upon retirement as the first recourse for recovery. In this respect, the timing of the execution of the APP and the release of gratuity/pension benefits need to be matched in order to capitalise on the opportunity to make good the arrears from gratuity benefits prior to the latter being released to the retiree. Nonetheless, the amounts in arrears due from a retiree s loan account may still be recovered from adjusting the monthly instalments as the second recourse to recovering the amount in arrears. An account is considered successfully settled if full payment has been collected for the amount in arrears. The 6-year historical data provided by BPP on the performance of its GSHLs indicates that gross defaults are primarily driven by applicants employment status (e.g. dismissed, retired 5 but not yet receiving pension, or resigned), whilst other factors such as inter-agency transfers, temporary leave of absence from service, and insufficient salary/pension for deduction influence the likelihood of a loan turning delinquent. Always first-ranking security position for GOM Security for the mortgage primarily comes in 2 forms: a first legal charge over the title of the property to ensure the Government s first-priority rights over the collateral and insurance coverage. The premiums for both fire (upon the property financed achieving 95% completion) and MRTA (upon the earlier of the property financed achieving 95% completion or 18 months from the first loan disbursement) are paid from the loan proceeds on a lump-sum basis. While this is common for MRTA coverage, the upfront lump-sum premium for fire insurance is a unique arrangement for GSHLs. Unlike normal insurance policies, coverage for GSHLs commences on the date the acceptance letter for the loan is received 5 This arises due to the timing difference between optional retirement (40 years of age) and when the retiree is entitled to pension benefits (45 years of age for females and 50 years of age for males if appointed prior to April 1991, or 55 years of age if appointed after April 1991). The age for compulsory retirement age is 56 years. 11

12 by BPP. Although there may be a timing gap between the formal acceptance of the loan agreement and the actual payment of the premiums, premiums are deemed paid from the acceptance date and the insurance coverage effective from that date thereafter. RAM views this positively as there should not be any instances where MRTA and fire insurance coverage are withheld due to nonreceipt of premiums.! Transaction Monitoring and Administration Cagamas to provide surveillance reports on collateral pool as Transaction Administrator As a servicer for the transaction, BPP will be responsible for the daily servicing of the portfolio, including collecting any payments on the GSHL receivables and enforcing the security on defaulted GSHLs as part of its normal collection procedures. While RAM notes that BPP has an adequate system to comply with its responsibility to continue originating and servicing the securitised mortgages, a higher level of transaction reporting will be required for this securitisation exercise. In this regard, Cagamas will undertake in its capacity as Transaction Administrator to deliver the quarterly reports detailing all related payments (principal, interest, prepayments and service fees) received/paid each month, and information on portfolio performance, e.g. the number of loans outstanding and prepaid, portfolio seasoning. As Transaction Administrator, Cagamas will also determine the repurchase consideration based on the pre-determined formula, as allowed under the MSPA.! Summary Risk profile of GSHLs is inherently different from conventional residential mortgages RAM considers the credit risk of GSHLs to be considerably less than those for conventional mortgages, for several reasons: (1) servicing of the mortgage loans is non-discretionary from the perspective of the borrower, and payment is deducted at source, thus minimising exposure to the borrowers credit risks; (2) there is low prepayment risk the interest on the GSHLs is charged at preferential sub-market rates; (3) so long as the borrower is still a public sector employee, any payment in arrears as a result of transfer or extended leave can be addressed by adjusting the monthly deductions. While this results in mismatched MRTA-to-loan profiles, this is partly compensated by the longer MRTA coverage period usually 1 to 2 years beyond the loan tenure. For employees that have retired early, such amounts in arrears can be deducted from the gratuity benefits granted to retirees to normalise the account as the first recourse, or secondly, by adjusting the monthly pension deductions; and (4) deductions for GSHLs rank senior to any other creditor under the law. 12

13 ! Portfolio Credit Analysis Four main default drivers for the pension-serviced GSHL portfolio The underlying portfolio backing the Bonds comprise GSHLs that are serviced through pension deductions. Several factors may contribute to defaults for pension-serviced GSHLs, as illustrated in the figure below. Firstly, the default risk arising from the borrower retiring before the pension deductions commence; secondly, the right to pension allowance being revoked due to personal bankruptcy, imprisonment or death sentence; thirdly, insufficient pension allowance to support loan repayment; and fourthly, MRTA-to-loan ratio of less than 100%. When pensions are revoked, the GOM has the right to make deductions from the alimentary allowance given; alimentary allowances are discretionary hardship concessions provided to pensioners dependents. Though discretionary, alimentary allowances have usually been granted in the past. As at end-february 2004, a total of 162 pensioners had their pensions revoked due to bankruptcy/imprisonment, a small proportion relative to the 430,000 pension accounts being administered by JPA currently (of which 274,287 pensioners have a GSHL outstanding). RAM s analysis has given full benefit to the GOM s right to deductions under this default scenario. Figure 2: Sources of GSHL repayment and default risk Salary Deductions from Various Payment Agencies Pension Deductions from JPA/MINDEF Under Employment Retirement (at retirement age) Full Settlement Conviction & Bankruptcy Death Resigns Dismissed No Pay Leave Optional Retirement (before retirement age) Deductions At Source MRTA Obligor Payment Portfolio of GSHLs to be securitised Death 13

14 ! Portfolio Eligibility Criteria Default risks of the pension-serviced portfolio minimised through the portfolio eligibility criteria To minimise the risk of losses due to defaults, the transaction s portfolio eligibility criteria have been structured to exclude such higher-risk loans. These criteria include the following circumstances: i) The borrower is a pensioner as defined under the relevant pensions law. ii) The mortgage is currently serviced by monthly deductions from the borrower s pension accounts by JPA (thus eliminating timing risk arising from delays in effecting the APP). iii) The monthly instalment for the mortgage is not greater than the amount of monthly pension due to the borrower (therefore alleviating concerns of loan affordability from the perspective of the borrower s credit strength). iv) The mortgage is not in default (defined as a loan that is 3 months or longer in arrears), or has any payment that has been rescheduled, amended or changed to avoid a delinquency or default, or following a delinquency or default. v) The mortgage must have been originated more than 6 months prior to the execution of the purchase contract. vi) The outstanding principal on the loan must not be greater than the sum assured under the MRTA policy. vii) The amount financed has been fully disbursed and the GOM retains no obligation to make any further advances and has fulfilled all its obligations prior to the sale of the GSHL. viii) The mortgaged property must not be Malay Reserve Land, Native Land or Customary Land.! Credit Risks to the Pool Pension-serviced GSHLs less vulnerable to default Prepayments a key credit consideration Due to the stringent portfolio eligibility criteria, the provisional pension-serviced pool is less vulnerable to default. As such, RAM did not apply any stress to defaults. Instead, we believe that the main credit risk of the securitised portfolio is the degree of prepayments, to the extent that it increases the likelihood of a greater quantum of cashflow being received earlier than anticipated, and reducing the amount of the future scheduled principal collections expected and, accordingly, the projected interest earned on the loans. The level of prepayment (dynamic data) experienced by pension-serviced GSHLs between 1998 and 2004 ranged from 0.11% to 0.31%. Over the same period, the outstanding principal of pension-serviced GSHLs remained relatively stable whilst the number of accounts grew by 4.2% to 73,716 (1998: 70,734). As at 29 February 2004, the principal balance of such GSHLs stood at RM2.08 billion (1998: RM2.79 billion). Historically, most of the prepayments have been involuntary (mostly due to death). A function of mortality rates, the likelihood of involuntary prepayments increases as the borrower ages. Based on the latest available data from the Department of Statistics, the life expectancy of an 14

15 average Malaysian is between 70 (male) and 75 (female) years. The average age of borrowers in the portfolio is years. Recoveries through claims on MRTA The recovery rate in the event of involuntary prepayment is determined by the ratio of the MRTA balance to the outstanding loan. As all eligible GSHLs in the portfolio are fully insured for the outstanding amounts, their recovery rates are assumed to be 100%. In this regard, RAM reviewed the capacity of the insurers to honour claims; we have assessed the credit profiles of MNI and Takaful and opine that they are favourable and provide adequate support to the transaction s rating. Based on the experience of the insurers, most claims have been paid out within 3-4 months upon receipt of the relevant death certificates. As at the pool cut-off date of 29 February 2004, the portfolio of eligible GSHLs consisted of 68,396 accounts with an outstanding principal of RM1,936 million. The securitised portfolio is well-seasoned, with a weighted-average seasoning of 14.9 years. This benefits the transaction, as most of the loans would have amortised significantly, thus reducing the LTV ratio of the mortgages at the close of the transaction. The pool profile is summarised in Appendix 1.! Cashflow Analysis RAM s cashflow analysis included a detailed assessment of the credit risks in this transaction including the risks of prepayment, liquidity and negative spread that are consistent with a AAA rating scenario. This is to ensure that there is sufficient cashflow to fully pay the coupons and principal of the Bonds in a timely manner. RAM s analysis of the portfolio has been restricted in part by insufficiently detailed historical data. Nonetheless, this has been addressed by RAM s stressed assumptions.! Prepayment Modelling Crucial to test for liquidity The main risk in the transaction revolves around the liquidity and timing of cashflow. A higher rate of prepayments increases the likelihood of receiving a greater quantum of cash earlier than anticipated. When collections from the prepaid mortgages are used to prepay the Series 4 Bonds under the conditional reverse-pay structure, the lower amount of future scheduled principal and interest collections on the loans may affect the transaction s ability to redeem the Bonds beyond the first scheduled redemption, i.e. the Series 2 and Series 3 Bonds. To assess the transaction s ability to withstand liquidity risk, RAM stress-tested the cashflow model under a zero-prepayment scenario. We further tested each series of the Bonds under a combination of a sustained period of substantial prepayments, followed by a period of zero prepayment. Cashflow losses due to unscheduled payments were assumed to arise from the prepayment of loans that 15

16 had a remaining tenure equal to the respective series of Bonds. Monte Carlo simulated prepayment model A AAA pay-off probability; likelihood of passthrough payment is low Collateralisation ratio of 124% To address prepayment risk, RAM ran a two-factor Monte Carlo-simulation on the transaction s cashflow model, i.e. the prepayment rates 6 and the remaining tenure of the prepaid loans. In this model, we assumed prepayment rates of 0% - 2.5% per annum, while prepaid loans were postulated to have remaining terms of 3 months to 10 years. The outcome of RAM s simulation indicates that the transaction will be able to comfortably pay the required coupons and fully redeem the Bonds by their respective legal final maturities with a AAA-rated probability, with low pass-through risk. The portfolio of securitised GSHLs provides a collateralisation ratio of 124% over the Bonds principal. While this ratio appears high, some of the future cashflow from the GSHLs is not expected to be collected within the Bonds tenure. As such, RAM s analysis did not give any credit to the cashflow beyond the tenure of the Series 4 Bonds, i.e. 10 years. We note that a certain percentage of the apparent overcollateralisation is required to cover the negative yield spread between the interest earned on the GSHLs and the transaction s funding cost. Figure 3: Asset and liability profile* 2,500,000,000 2,000,000,000 Projected Closing Cash Position Bond Principal Outstanding Pool Principal Outstanding (after prepayment) Scheduled Pool Principal Outstanding 2,500,000,000 2,000,000,000 1,500,000,000 1,500,000,000 1,000,000,000 1,000,000, ,000, ,000,000 0 Source: RAM * Sample result of one simulated scenario Months 6 Defined as the principal amount prepaid during that period, divided by the opening principal balance of the pool at the beginning of the period. 16

17 ! Legal Issues This represents the second transaction approved under the Securities Commission s Asset-backed Securities ( ABS ) guidelines that does not involve an orphan SPV-issuer 7. Under RAM s rating approach for parent-subsidiary relationships, it has been established that a parent and its affiliates, at times, may be viewed as having distinct credit risk profiles. The difference in default risk may arise from covenants, structural or legal restrictions and regulations. Accompanying covenants a strong support factor Assurances from Cagamas as well as the nature of Cagamas MBS incorporation documents have played a large part in forming our assigned rating. Firstly, comfort was drawn from assurances by Cagamas that future transactions of Cagamas MBS will include non-petition and limited-recourse clauses; crosscollateralisation of security is not expected. Secondly, RAM also considered certain restrictions within its memorandum of articles and association ( M&A ); particularly noteworthy is Article 107 of the M&A that prohibits any member from commencing any action or proceedings to wind-up Cagamas MBS so long as any debt remain outstanding. RAM has reviewed the key transaction documents for the first bond issue and is of the opinion that it provides adequate protection for the bondholders in terms of cashflow priority and support for the rating. These attributes, when combined with the ensuing covenants, provide comfort that the risk profile of Cagamas MBS will be reasonably detached from that of Cagamas. Nonetheless, RAM will continue to assess and evaluate the impact of any future debt issuance by Cagamas MBS on the Bonds. RAM has reviewed the related transaction documents to its satisfaction, to ascertain that the legal structure of the transaction represented to RAM can be adequately supported in assigning the rating. The cash flow allocated in respect of the tax liability pertains only to this portfolio. Future transactions of a similar nature engaged by Cagamas MBS will also apportion tax expenses in respect of each portfolio securitised. All administrative overheads and expenses will be borne by Cagamas as the role of Transaction Administrator.! Surveillance RAM will continue to monitor the transaction on a regular basis via the quarterly reports to be prepared by the Transaction Administrator, and as warranted by any extraordinary event, until the Bonds mature or are retired. The transaction 7 Securita ABS One Berhad ( Securita or SPV ) was incorporated to undertake the securitisation of a portfolio of the Pengurusan Danaharta Nasional Berhad ( PDNB ) Group s performing and restructured loan facilities. It was established as a wholly owned subsidiary of PDNB to retain the latter s special powers conferred under the Danaharta Act,

18 reports will contain key performance indicators for the underlying collateral and the Bonds. Periodic meetings will also be held with the Servicer, the respective insurers and Cagamas to ensure that the minimum servicing standards are met. The transaction s surveillance updates will be made available on RAM s website at 18

19 ! Corporate Information () Date of Incorporation: Commencement of Business: 8 June June 2004 Major Shareholders: Directors: Auditor: Listing: Key Management: Major Subsidiaries: Cagamas Berhad 100% Dato Mohd Razif Abdul Kadir N. Kokularupan Dato Huang Sin Cheng PricewaterhouseCoopers Not listed Not applicable None Capital History: Year Remarks Amount Cumulative Total (RM) (RM) 2004 Initial share capital

20 Profile of Pensioners Pool Appendix 1 Teachers Breakdown by Occupation 14.94% Breakdown by Loan Type (by No of Accounts) Purchase of land 1.3% Members of Parliament & State Assembly 0.01% Refinancing 1.5% Administrative Members Armed Forces 0.05% 30.73% Purchase of properties under construction 73.6% Purchase of land and completed dwelling 16.0% Police Force 6.43% Construction of dwelling 7.6% Public Sector 47.84% 0% 10% 20% 30% 40% 50% 60% Principal Outstanding Breakdown by Principal Outstanding Breakdown by Monthly Instalments >RM100, % >RM1, % RM750 - RM % RM50,000 - RM99, % RM500 - RM % RM10,000 - RM49, % RM250 - RM % <RM10, % < RM % 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% No of Accounts 0% 10% 20% 30% 40% 50% No of Accounts No of Accounts 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Breakdown by Seasoning Remaining Term-to-Maturity Source: BBP 20

21 RAM S CREDIT RATING DEFINITIONS (Structured Finance Ratings) LONG-TERM RATINGS AAA AA A BBB BB B C D Issues rated AAA are judged to be of the best quality and offer the highest safety for timely payment of interest and principal. High safety for timely payment of interest and principal. Adequate safety for timely payment of interest and principal. More susceptible to changes in circumstances and economic conditions than debts in higher-rated categories. Moderate safety for timely payment of interest and principal. Lacking in certain protective elements. Changes in circumstances are more likely to lead to weakened capacity to pay interest and principal than debts in higher-rated categories. Inadequate safety for timely payment of interest and principal. Future cannot be considered as well-assured. High risk associated with timely payment of interest and principal. Adverse business or economic conditions would lead to lack of ability on the part of the issuer to pay interest or principal. Very high risk of default. Factors present make them vulnerable to default. Timely payment of interest and principal possible only if favourable circumstances continue. Payment of interest and/or repayment of principal are in arrears. Already in default. SHORT-TERM RATINGS P1 P2 P3 NP Very strong safety with regard to timely payment on the instrument. Strong ability with regard to timely payment of obligations. Adequate safety with regard to timely payment of obligations. Instrument is more vulnerable to the effects of changing circumstances than those rated in the P1 and P2 categories. High investment risk, with doubtful capacity for timely payment of short-term obligations. For long-term ratings, RAM applies subscripts 1, 2 or 3 in each rating category from AA to C. The subscript 1 indicates that the issue ranks at the higher end of its generic rating category; the subscript 2 indicates a mid-ranking; and the subscript 3 indicates that the issue ranks at the lower end of its generic rating category. In addition, RAM applies the suffixes (bg) or (s) to ratings which have been enhanced by a bank guarantee or other supports, respectively. 21

22 Published by Rating Agency Malaysia Berhad. Reproduction or transmission in any form is prohibited except by permission from RAM. Copyright 2004 by RAM Rating Agency Malaysia Berhad No. 19-G, The Boulevard Mid Valley City Lingkaran Syed Putra Kuala Lumpur Tel: (603) Fax: (603) Website: 22