STRUCTURED FINANCE RATINGS. CAGAMAS MBS BERHAD, CMBS i New Issue. Nominal Amount (RM million) Final Rating. Cagamas MBS Berhad

Transcription

1 STRUCTURED FINANCE RATINGS RATING AGENCY MALAYSIA BERHAD (Incorporated in Malaysia under Companies Act. 1965) Co. No U MAY 2007 Analysts: Ooi Phee Lip (603) Joanne Kek (603) Siew Suet Ming (603) Issuance Date: 29 May 2007 Trust Assets: The Issuer will hold the following as agent and trustee for the holders of the Sukuk Musyarakah: (i) All the Mortgage Assets of Portfolio i (ii) All rights, titles and benefits including all collections and proceeds realised from Portfolio i (iii) Rights under Collections Account i (iv) Rights under the Administration Services Documents i and Transaction Documents CAGAMAS MBS BERHAD, CMBS i New Issue! Issue Details Sukuk Musyarakah Final Rating Nominal Amount (RM million) Expected Profit (%) # Tenure (years)* Maturity Date CMBS i AAA RM2,110.0 Tranche i/1 RM % May 2010 Tranche i/2 RM % May 2012 Tranche i/3 RM % May 2014 Tranche i/4 RM % May 2017 Tranche i/5 RM % May 2019 Tranche i/6 RM % May 2022 Tranche i/7 RM % May 2027 * From Issuance Date # Profit rate are per annum and payable quarterly in arrears Key Transaction Parties Issuer Originator/Servicer Transaction Administrator/Administrator Insurer Lead Arranger / Principal Adviser Joint Lead Managers Facility Agent Syariah Advisor Legal Counsel for the Issuer Legal Counsel for the Lead Arranger/Joint Lead Managers Accounting Advisor Tax Advisor Reporting Accountant Trustee Portfolio i Summary* Collateral Portfolio of GSIHF Government of Malaysia Cagamas Berhad (rated AAA/P1, with a stable outlook) Takaful Nasional Sdn Berhad CIMB Investment Bank Berhad ( CIMB, formerly known as Commerce International Merchant Bankers Berhad) Aseambankers Malaysia Berhad, CIMB, and HSBC Bank Malaysia Berhad CIMB CIMB Islamic Syariah Committee Messrs Wong & Partners Messrs Zul Rafique & partners PricewaterhouseCoopers PricewaterhouseCoopers Taxation Services Sdn Bhd Ernst & Young Malaysian Trustees Berhad Portfolio principal balance RM 2,538,180, Number of GSIHF 26,061 Average GSIHF size RM 97,394 WA remaining term of GSIHF years WA portfolio seasoning 2.81 years WA profit rate 4.00% WA age of employee years Current employment status Pensioners: 1.18%; Government civil servants: 98.82% Top 3 occupations Public servants: 86.27%; Police force: 5.84%; Teachers: 2.96% Distribution by scheme EPF scheme: 10.12%; Pension scheme: 89.88% GSIHF = Government Staff Islamic Home Financing; WA = weighted average; As of the Purchase Date 31 January 2007 RAM s rating is not a general-purpose evaluation of an issuer, but an assessment of a specific securities issue. Accordingly, a security 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 This is the fourth issuance of asset-backed securities ( ABS ) by Cagamas MBS Berhad ( Cagamas MBS ), and the second issuance of Islamic securities backed by a portfolio of Government staff Islamic home-financing ( GSIHF ). As permitted under its incorporation documents and the Master Sale and Purchase Agreement 2007 ( MSPA 2007 ) with the Government of Malaysia ( GOM ), Cagamas MBS will issue ABS from time to time to fund its purchases of Government staff housing loans ( GSHLs ) and GSIHFs that have been granted to civil servants pursuant to the Akta Kumpulanwang Pinjaman Perumahan, or the Housing Loans Fund Act Under the principle of Musyarakah, the CMBS i Sukuk Musyarakah involves a partnership between various parties that provide capital towards the financing of the business venture. For the CMBS i Sukuk Musyarakah, both profits and losses will be shared on the basis of equity participation. CMBS i Sukuk Musyarakah represents the trust certificates issued by Cagamas MBS as the wakeel (or trustee) under a Declaration of Trust to the investors of the Musyarakah venture, involving the purchase of a portfolio of GSIHF originated under the Skim Pembiayaan Perumahan Secara Islam ( SPPI ) from the GOM. As the wakeel for the investment, Cagamas MBS will hold all the rights, titles, and benefits of the GSIHF and, at the same time, assume control and possession over the GSIHF purchased for the Musyarakah investors. The portfolio of GSIHF to be purchased is serviced via monthly deductions from the salaries of public-sector employees and the pensions of retired public-sector employees. RAM has assigned a final rating of AAA to the RM2,110 million Islamic residential mortgage-backed securities ( Sukuk" or CMBS i") issued by Cagamas MBS. The rating reflects the quality of the collateral, the originator s underwriting and servicing capabilities, and the credit enhancement afforded by the transaction structure and overcollateralisation. CMBS i has been structured with no cross-collateralisation against the other securities issued by Cagamas MBS, with non-petition and limited-recourse clauses specific only to the assets available under this transaction. RAM s rating only addresses the credit risks associated with the Sukuk, and does not take into account the likelihood of any early refund of Tranche i/6 and Tranche i/7 of the Sukuk Musyarakah prior to their respective maturity dates.! Transaction Strengths The repayment of the GSIHF is non-discretionary on the part of the employee, i.e. payments for the GSIHF are deducted at source (through salary deductions for active employees and via pension deductions upon retirement), thus reducing exposure to the employees creditworthiness. 2

3 Moreover, deductions for GSIHFs rank senior to any other creditor under the law. The risk of voluntary prepayment is deemed low, as the profit payable on the GSIHF is a preferential sub-market rate. Furthermore, as the profit rate of the GSIHF and the expected profit rates of the Sukuk have been determined upfront, this removes Cagamas MBS s exposure to profit-rate and basis risks. Transparent regulatory framework highlighting home financing entitlements, procedures for recovery, pension benefits, eligibility and pension calculations. The securitised portfolio of RM2,538 million provides a collateralisation ratio of % over the Sukuk. While this ratio appears high, some of the future cashflow from the GSIHF is not expected to be collected within the investment period of the Sukuk; RAM s analysis has not given any credit to the cashflow beyond the investment period of the Tranche i/7 Sukuk Musyarakah, i.e. 20 years. In RAM s opinion, this level of apparent overcollateralisation provides sufficient protection against the risks of prepayment, negative variance of investment returns (between the profit earned on the portfolio of GSIHF and the expected profit rates for the Musyarakah venture) and liquidity in the transaction under a AAA stressed scenario.! Transaction Concerns The operational and administrative processes of the various Government agencies have, at times, not been timely vis-à-vis the execution of payment deduction instructions. However, administrative changes in respect of the current salary deduction process presently in progress are anticipated to reduce such concerns for the securitised portfolio. Furthermore, this is alleviated by the transaction s payment mechanism and the portfolio s eligibility criteria, i.e. to only securitise GSIHFs for which salary or pension deductions have already begun. While detailed historical data had been available, analysis of each static-pool (i.e. 1996, 1997, 1998, 1999 and 2000) mortgage performance has been limited to 9 years vintage data vis-à-vis the 25-year mortgage life of a typical GSIHF and the weighted-average seasoning of the securitised portfolio of GSIHF of 2.81 years. The underlying portfolio for CMBS i includes borrowers that are on the Employee Provident Fund ( EPF ) Scheme (10.12%); these borrowers are not entitled to gratuity or monthly pensions when they retire. However, as 3

4 the tenure of the GSIHF for borrowers under the EPF Scheme cannot exceed their pensionable age, the risk of discretionary deductions for the securitised portfolio is significantly reduced. The transaction has the option to refund capital to the outstanding Sukuk arising from prepayments to be paid in inverse order to the last 2 tranches, i.e. Tranche i/7 (scheduled maturity in year 20), followed by Tranche i/6 (scheduled maturity in year 15), provided that the cash balance in Collections Account i exceeds RM90 million after any such refund of capital to Tranche i/7 and/or Tranche i/6. In addition, the transaction may also pay an additional Servicer Bonus Fee on each maturity date if the securitised portfolio meets certain performance indicators, e.g. expected default rates, prepayment rates. If exercised, this may introduce potential liquidity risk to the investment, particularly during sustained periods of prepayment incidences.! Rating Approach GSHLs and GSIHFs originated by the GOM represent a unique class of mortgages and are inherently different from commercial mortgage loans. The quality of commercial mortgages 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 employees debt-to-income ratios as a measure of debt servicing ability, the loan-to-value ( LTV ) ratio as a measure of the employees invested equity in the property, and/or the degree of the employees sensitivity to changes in interest rates/profit 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/GSIHFs is considerably better compared to those of commercial 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/profit rate on the GSHLs/GSIHFs 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 Mortgage Reducing Term Assurance ( MRTA )-to-loan profiles, it is partly compensated by the longer MRTA coverage period usually 1 to 2 years beyond the mortgage life. For employees who 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/GSIHFs rank senior to any other creditor under the law. 4

5 For borrowers on the EPF scheme, the maximum loan/financing tenure is limited to their pensionable age, thus reducing the risk of the discretionary payments. Nonetheless, we acknowledge that any arrears not fully settled at retirement remains at risk of default. RAM s general assessment of GSHL/GSIHFs portfolios indicates that defaults are primarily driven by employees employment status (e.g. dismissed, retired 1 but not yet receiving pension, or resigned). 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/financing turning delinquent (Figure 1). For a review of the Servicer, please refer to the rationale published for CMBS in October Figure 1: Sources of repayment and default risk Salary Deductions from Various Payment Agencies Pension Deductions from JPA/MINDEF Under Employment Resigns Dismissed No Pay Leave Optional Retirement Death (before retirement age) Retirement For borrowers under the GOM Pension Scheme only (at retirement age) Conviction & Bankruptcy Death Full Settlement Deductions At Source MRTA Obligor Payment Portfolio of GSIHFs to be securitised The employees within the securitised portfolio have a weighted-average age of years; the majority of the employees will only enter pensionable age beyond the 15 th year of this transaction. As such, the applied rating criteria have been mainly driven by the risk profiles of employees still under active employment. For CMBS i, the extent of potential default in the portfolio 1 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 is 56 years. 5

6 primarily depends on the status of the employee.! Transaction Overview! The Issuer Cagamas MBS is a limited-purpose entity that has been specifically incorporated for the purpose of securitisation of GSHLs/GSIHFs. By virtue of its incorporation documents, Cagamas MBS activities are limited to the purchase of GSHLs/GSIHFs from the GOM and the issuance of securities to fund such purchases. Its parent, Cagamas Berhad 2 ( Cagamas ), is the national mortgage corporation that was established at the initiative of Bank Negara Malaysia, the central bank, to develop the secondary mortgage market in Malaysia. The CMBS i Sukuk Musyarakah is the fourth issuance of securities for Cagamas MBS, following the issuance of CMBS Bonds in October 2004, CMBS i Sukuk Musyarakah in August 2005, and CMBS Bonds in December The current 3-member board of Cagamas MBS includes nominees of Cagamas though at least a third of its board members shall comprise independent directors. RAM expects the parent company to continue to have 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 Sukuk holders interests will be preserved (refer to Legal Issues). RAM affirmed the AAA/P1 ratings (with a stable outlook) for all of Cagamas outstanding unsecured senior debts on 22 June ! Structure Summary for CMBS i Under this Musyarakah venture, investors will provide capital to purchase the portfolio of GSIHF from the GOM the investment and appoint Cagamas MBS as the wakeel for the investors via a Musyarakah Declaration of Trust. Cagamas MBS, in turn, will issue the Sukuk Musyarakah to represent the investors undivided and proportionate beneficial ownership in the business venture. Musyarakah arrangements involve a partnership between various parties that provide capital towards the financing of the investment. While profits are shared based on an agreed ratio, losses are shared on the basis of equity participation. 2 RAM understands that Cagamas is proposing to undertake an internal restructuring exercise, which will result in the incorporation of a new holding company, Cagamas Holdings Berhad. Upon completion of the said exercise, Cagamas and Cagamas MBS will become wholly owned subsidiaries of Cagamas Holdings Berhad. Based on our discussions with Cagamas and information made available to RAM, we are of the opinion that the proposed restructuring will not result in any material adverse change to the activities and operations of the subsidiary companies. 3 For further details, please refer to RAM s rating rationale on Cagamas published on 22 June

7 For CMBS i, profits up to the agreed profit rate will be distributed to the investors in proportion to their (nominal) capital contribution (for each tranche of the Sukuk Musyarakah) into the venture. At the same time, the investors agree to share profits and losses in the ratio of the capital invested to the total amount of capital invested for the business venture. At the close of the transaction, Cagamas MBS will issue RM2,110 million of trust certificates to fund the purchase of the portfolio of GSIHF from the GOM, and defray any issuance costs and expenses incurred. The portfolio as at the Purchase Date 31 January 2007 ( Purchase Date i ) comprises 26,061 GSIHF and a principal balance of RM2,538 million, serviced by publicsector employees (98.82%) and former employees who have opted for the GOM s pension scheme (1.18%). The portfolio also includes 10.12% of borrowers who have opted for the EPF Scheme, which is available to Government employees (except for judges and political ministers) who entered GOM service on and after 12 April This transaction is structured with a companion bond feature 5. While the capital refund schedule is fixed, the transaction allows for prepayment of the capital on the outstanding Sukuk Musyarakah to the last 2 tranches in reverse order, i.e. the Tranche i/7 (schedule maturity in year 20) followed by Tranche i/6 (schedule maturity in year 15) on the scheduled redemption date of each tranche of CMBS i. However, the refund can only occur if the cash balance in Collections Account i exceeds RM90 million after any such refund of capital to Tranche i/7 and/or Tranche i/6. If exercised, this may introduce potential liquidity risk to the investment, particularly during sustained periods of prepayment incidences. Collections from the GSIHF will be used to meet fees and expenses, tax arising from the investment in Portfolio i, and the expected profit and scheduled return of capital to the Sukuk holders according to a pre-determined cashflow waterfall. Additionally, the CMBS i transaction also incorporates a Servicer Bonus mechanism where the Issuer may, at its discretion, pay the Servicer a bonus fee amounting up to 2% of the total money (excluding prepayments by the obligors) collected during a Bonus Determination Period, subject to meeting certain Portfolio Performance Criteria (e.g. maximum cumulative net default rates, minimum cumulative prepayment rates), and Servicer Performance Criteria (e.g. timeliness of collections, reporting accuracy of the servicer report and achievement of foreclosure timelines). Servicer Bonus will be calculated and paid on the scheduled maturity date of each tranche of CMBS i. 4 To date, approximately 38,000 of civil servants have opted for the EPF Scheme. 5 Companion bonds are largely designed to minimise, if not eliminate, prepayment risks for investors. They do this by essentially transferring all prepayment risks to other bonds or tranches in the MBS transaction, in this instance, the Tranche i/6 Sukuk and Tranche i/7 Sukuk. 7

8 As the wakeel for the investors, Cagamas MBS will execute a Master Sale and Purchase Agreement MSPA 2007 with the GOM, specifying the criteria for the mortgage properties that are eligible for purchase. Only GSIHF related to the purchase of residential properties that have been issued certificates of fitness and purchase of land, GSHIF that have been fully disbursed and are currently being settled by the employee via monthly instalments, as well as GSIHF where the mortgaged properties have been fully paid for, are eligible under the MSPA ( Core Eligibility Criteria ). In addition, the mortgage must have originated more than 6 months prior to the Purchase Date. 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 eligible GSIHF to the Sukuk holders on a true sale basis, by way of an equitable absolute assignment; the security will only be perfected and the employee notified of the sale upon a Dissolution Event for the Sukuk. Figure 2: Transaction overview Cagamas (Transaction Administrator & Administrator) Prepares transaction and servicer reports and performs administrative duties Cagamas* (parent company) 100% ownership Malaysian Trustees Berhad (Trustee) GOM (Originator/ Servicer) Hold in trust the portfolio of GSIHFs and related security Purchase consideration Cagamas MBS (Wakeel) Sukuk issued to investors Proceeds from Sukuk subscription Investors Sukuk Musyarakah GSIHFs Servicing assets Provides MRTA and fire insurance coverage for the mortgages Monthly deductions Takaful Nasional Sdn Bhd Accountant General s Office Government office administrating salary Pensions Division, Public Services Department Government agency administrating pension payments * Pursuant to the restructuring exercise, Cagamas Holdings Bhd Under the Deed of Warranties 2007 executed concurrently with MSPA 2007, the GOM will make certain representations and warranties that the GSIHF sold conform to the eligibility criteria. If these GSIHF are subsequently found to be non-compliant, the GOM will either (i) make compensation for the affected GSIHF, with the compensated amount paid on a deferred basis equal to the 8

9 monthly scheduled instalments received from the employee; or (ii) replace the affected GSIHF with other GSIHF acceptable to the Issuer. As the servicer for the business venture, the GOM (through Bahagian Pinjaman Perumahan) will be responsible for the servicing of the portfolio and providing quarterly servicer reports to Cagamas. Cagamas in its capacity as the Transaction Administrator will deliver quarterly investor reports on the portfolio s performance, in addition to estimating the compensation amount, as permitted under the Deed of Warranties 2007.! Series-Specific Portfolio Eligibility Criteria In relation to the portfolio purchased for CMBS i, each GSIHF must, in addition to the Core Eligibility Criteria, meet inter-alia, the following key criteria: i) The mortgage is a financing granted under the SPPI programme. ii) The mortgage is serviced by an employee who is currently in the service of the Government (other than in service in the Armed Forces) and has opted for the Government s pension scheme or the Employee Provident Fund Scheme, or an ex-employee already on the pension scheme. iii) The monthly instalment for the mortgage is not greater than the amount of monthly salary/pension due to the employee. iv) The mortgage is not in default (defined as a GSIHF 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 outstanding principal on the GSIHF must not be greater than the sum assured under the MRTA policy, with each MRTA policy remaining in effect at least until the last scheduled mortgage instalment. vi) The salary/pension deduction for Monthly Instalments must have commenced at least 6 months prior to Purchase Date i. vii) The original tenure of the mortgage must not be more than 25 years. Built into the structure is an optional cancellation of the outstanding Sukuk, when the underlying provisional GSIHF pool has been reduced to 10% or less of the original capital invested. Mandatory cancellation of the Sukuk Musyarakah will occur on any profit distribution date if there is a material breach under the Deed of Warranties Upon the cancellation and fulfilment of all obligations on the Sukuk Musyarakah, the GOM, as Servicer to the transaction, will be entitled to a discretionary bonus payment, the amount to be decided at the discretion of Cagamas MBS.! Accounts and Payment Structure For this transaction, Cagamas MBS will open a Syariah-compliant account ( Collections Account i ) for the GSIHF portfolio purchased, to be solely 9

10 operated by the Trustee and into which the GOM will deposit payments collected from the GSIHF acquired, on a quarterly basis. In the meantime, money needed to cover tax liabilities incurred by each purchased portfolio will be transferred from the respective Collections Account into a common Operating Account; money not related to the GSIHFs portfolio purchased, if any, shall also be deposited into the Operating Account. Should Cagamas MBS be required to refund any excess monthly deductions received (i.e. amount received which is in excess of the amount contractually payable by the obligors in the securitised portfolio) prior to the Purchase Date, the refund will be met from the initial cash reserve of RM1.25 million deposited into Collections Account i. This initial cash reserve will be funded upfront from the Sukuk issuance proceeds on the issuance date. Total refund of excess deductions received prior to the Purchase Date will be limited to a maximum of RM1.25 million. Meanwhile, refunds for excess monthly deductions received after the Purchase Date will be met from the cash in Collections Account i. Cagamas MBS can only invest its available cash in permitted investments provided such investments in securities mature no later than 5 business days before the next profit distribution date, with the exception of money-market instruments and accounts held with financial institutions which may mature no later than 2 business days before the next profit distribution date. Provided that no Dissolution Event has occurred, funds in Collections Account i 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, 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 profit distribution 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 profit distribution date. v) Refund of any excess monthly deductions received from the obligor that it is not contractually obliged to pay. vi) Profit (if any) up to the agreed amount to the Sukuk holders on their respective distribution dates. vii) Scheduled return of capital at each respective end of the investment period, in proportion to the Sukuk holders capital participation in the investment, until all Sukuk Musyarakah have been cancelled and the invested capital has been returned. viii) Payment of a Servicer Bonus (if any) at the discretion of the Issuer, subject to fulfilling certain criteria relating to portfolio performance and 10

11 ix) Servicer performance. Inverse return of capital and cancellation on firstly the outstanding Tranche i/7 and subsequently the Tranche i/6 at the option of the Issuer (after giving no less than 30 days or more than 60 days), subject to the Collections Account i having a cash balance exceeding RM90 million after prepayment. If a Dissolution Event occurs, all the Sukuk Musyarakah will be cancelled and the invested capital will be returned to the Sukuk holders. Funds in the Collections Account i 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, Facility Agent and Rating Agencies fees, to the extent that these fees have not been paid by the Transaction Administrator. iii) Expenses incurred in connection with the disposal and winding up of the transaction. iv) Payment of the Servicer fees for its accrued and unpaid fees. v) Pro-rata distribution of the profit on the Sukuk Musyarakah, if available, up to the agreed amount. vi) Pro rata return of capital in the Musyarakah venture until all the Sukuk has been cancelled. vii) Payment to the Transaction Administrator and Administrator. viii) Residual balance to the Issuer. Key Dissolution Events in relation to the Sukuk Musyarakah include the failure to meet or distribute any amount on the scheduled dates; on the Sukuk Musyarakah and termination of the Musyarakah Declaration of Trust between Cagamas MBS and the investors. Other Dissolution Events incorporate breach of the obligations under the transaction, any change in the nature of the Company s business activity, Cagamas MBS becoming insolvent or ceasing to be a subsidiary of Cagamas/Cagamas Holdings Bhd, 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 Update In April 2007, RAM met up with the key representatives from Bahagian Pinjaman Perumahan ( BPP ), the division of the Ministry of Finance that is responsible for servicing and monitoring of GSHLs, as part of RAM s due diligence process. The meetings covered a review of their operations and the progress that had taken place since the last meeting in October

12 Empowered under the Housing Loans Fund Act, 1971 (Act 42), BPP is empowered 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 22 April 2007, approximately RM23.69 billion 6 (including those sold to Cagamas MBS) in outstanding principal balance approved by BPP remain (2005: RM25.40 billion).! Revisions to Lending Policies Since RAM s last review of BPP s origination process, there have been a number of revisions in the latter s lending policies. Key changes include the following: i) Loan/financing entitlement. An increase in the maximum loan/financing entitlement by approximately 20% for all pay scales. ii) iii) iv) Insurance requirement. Compulsory MRTAs for both first and second housing mortgages. Prior to the revision, MRTA had been optional for the second mortgage. In addition to Takaful Nasional Sdn Berhad ( Takaful Nasional ) and Syarikat Takaful Malaysia Berhad, borrowers can now obtain insurance coverage from Takaful Ikhlas Sdn Bhd. We note that the sole insurer for the underlying securitised portfolio for the CMBS i Sukuk Musyarakah is Takaful Nasional. As such, RAM has not performed any due diligence on Takaful Ikhlas for the purposes of CMBS i. In this regard, RAM has reviewed the capacity of the insurer to honour claims and deems Takaful Nasional s credit profile as adequate to support the transaction s rating. Second housing mortgage. At the point of application, the borrower must have fully settled their first housing mortgage. Furthermore, the loan/financing entitlement is now effectively capped for the entire service period. Prior to the revision, all second home loans/financing could be approved if the first loan/financing amount was below one-third of the initial outstanding principal or the remaining tenure was less than 5 years. Certain exemptions for borrowers whose mortgages had been cancelled due to abandoned house purchases (as certified by the Housing and Local Government Ministry or Survey and Mapping Department). To qualify for the new scheme, borrowers must apply for and obtain approval from the Government. To date, as represented by BPP, there have been very few cases that have requested for the said exemption. On a separate note, there have been recent reports of a possible change in the 6 Source: BPP/Cagamas Berhad 12

13 GOM pension scheme for civil servants, with a view to implement a contributionbased system which is similar to that of the optional Employees Provident Fund ("EPF") introduced in Like the EPF scheme, the contribution-based system involves contributions from both the GOM and civil servants, to a proposed Pension Trust Fund. However, we note that no formal announcement has been made on this matter. RAM will maintain close monitoring of the relevant developments to determine the implications for CMBS i and make the appropriate rating actions when more concrete information becomes available.! Process Update: Servicing, Arrears Management and Enforcement Apart from the various initiatives made so far, BPP is also embarking on a 2- pronged strategy to enhance its operational efficiency and to reduce the occurrence of administrative delays through, firstly, the upgrading of its current applications system to an end-to-end financial system; secondly, to request for conversion of some of its contract staff to permanent positions. The new financial system is expected to be fully rolled out by early 2008 and is anticipated to help reduce the time taken for the collection and reconciliation of information. With the new end-to-end financial system, BPP has indicated that the monthly salary/pension deduction will be made directly from the Accountant General s office, which should reduce administrative delays with respect to payroll management. Under current practice, the monthly deductions are transferred from the respective Government agencies. In our last rating review in March 2007 of the 3 transactions of Cagamas MBS, RAM had highlighted that the transitory administrative issues faced by BPP arising from the expansion of its role to include the servicing of the securitisation transaction had lengthened the time taken to reconcile the differences between payments received by BPP and the amounts remitted by BPP to Cagamas MBS. Additionally, we understand that post reporting and subsequent loan verifications had taken additional time to generate the investor reports. Nonetheless, RAM notes that these issues are not expected to have an adverse effect on the securitised portfolio in respect of defaults and prepayments. Positively however, RAM notes that the task force established by the GOM to expedite the recovery process for delinquent accounts has proven effective, recovering approximately RM20.7 million for the 10-month period ended December 2006, notwithstanding the on-going recovery efforts by the legal unit to recover on defaulted GSHLs. While these operational changes are being made, RAM opines that such efforts should, in time, be able to enhance operational efficiency and address the administrative issues experienced in the servicing of securitisation transactions. 13

14 ! CMBS i Portfolio Credit Analysis The underlying portfolio for the Musyarakah venture comprises GSIHF that are serviced by monthly deductions from public-sector employees (98.82%) as well as from the pension payments of former employees (1.18%). As at the Purchase Date i, the CMBS i portfolio consisted of 26,061 contracts with an average outstanding balance of approximately RM97,394, a weighted-average remaining term-to-maturity of years, and an average seasoning of approximately 2.81 years. From the portfolio of GSIHF, mortgages extended to the general sector made up 86.27% of the aggregate outstanding amount while teachers constituted 2.96%, and members of the police force, 5.84%. Unlike its previous issuances that involved only GSIHF/GSHLs serviced by public-sector employees who have opted for the Government pension scheme, CMBS i includes those that are on the EPF Scheme (10.12%); these borrowers are not entitled to gratuity or monthly pensions when they retire. However, as the tenure of the GSIHF for borrowers under the EPF Scheme cannot exceed their pensionable age, the risk of discretionary deductions for the securitised portfolio is significantly reduced. Appendix 1 provides further description of the provisional pool. In reviewing our assumptions of the portfolio behaviour of GSHLs and GSHIF, RAM had used the observed historical default and prepayment data from the originator s GSIHF portfolio by their year of origination from 1998 to March 2005, for each static pool, i.e. from 1996 to We also took into consideration the performance of 3 securitised pools todate, and relied substantially on the assurances provided by the Servicer on the various new developments to be implemented, as well as the preliminary results indicated by the task-force audit, juxtaposed against the observed historical defaults and the prepayment date of the originator s GSHL and GSHIF portfolio.! Underlying assumptions for CMBS i For CMBS i, RAM has assumed a base-case monthly default rate of 0.052% (of the initial pool balance) for the mortgage pool for the first 88 months post securitisation, followed by a monthly default rate of 0.042%. RAM has assumed increasing monthly prepayment rates from 0% to 0.2% (of the initial principal balance) over the 108 months; followed by a constant monthly prepayment rate of 0.20% for the remaining mortgage life. RAM has also assumed a recovery rate of 5% (of defaulted amount) with a recovery period of 18 months. Additionally, RAM recognises that mortgage loans which are eventually serviced by pension deductions from retired public-sector employees can be fully recovered from MRTA insurance - as all GSIHFs are fully insured. 7 Please refer to the rationale for CMBS i published in August 2005 for a full description and analysis of the historical data. 14

15 ! Cashflow Analysis RAM s cashflow analysis includes a detailed assessment of the credit risks in this transaction including the risks of default, delinquency, prepayment, liquidity and negative spread that are consistent with an AAA rating scenario. This is to ensure that there is sufficient cashflow generated by the assets in the Musyarakah venture to meet the timely distribution of the expected profits and scheduled capital returns by the end of each respective maturity date of the Sukuk Musyarakah. In rating CMBS i, RAM has taken into consideration the potential cashflow arising from Compressed Profit. Due to potential timing difference between disbursement and actual amortisation of the mortgage, a compressed profit charge is sometimes added to the borrower s monthly salary/pension deductions; the compressed profit charge is the charge due to the additional profit incurred over the period and is apportioned over the remaining tenure of the financing. This typically arises when the instruction for salary/pension deductions is effected after the actual financing has been disbursed. Based on the portfolio information received, there is an estimated RM19.7 million of Compressed Profit scheduled to be collected over the life of the portfolio. In sizing the required credit enhancements that commensurate with the AAArating, RAM has assumed the following credit stresses: i) A monthly default rate of 0.052% for the first 88 months of the mortgage life before reducing to a monthly rate of 0.042% for the remaining mortgage life, at a stress multiple of 2.0 times. ii) Monthly prepayment rates increase from 0% of the initial principal balance over a 108-month period, and remain at a constant monthly rate of 0.20% for the remaining mortgage life. A stress multiple of 2.0 times is applied to the prepayment rate. iii) A current month delinquency ratio of 25% (initial principal balance), recovered by the 9 th month in full from the date of original scheduled instalment. iv) A recovery rate of 5% of the defaulted principal and a recovery period of 18 months. To assess the transaction s ability to withstand liquidity risk, RAM also stresstested the cashflow model under the base-case, prepayment-rate scenario. The outcome of RAM s analysis indicates that the transaction will be able to comfortably meet the expected profit distributions on a timely basis, and return capital to the Sukuk Musyarakah holders by the end of each respective investment period with an AAA-rated probability. 15

16 The portfolio of securitised GSIHF provides a collateralisation ratio of % over the CMBS i Sukuk Musyarakah. While this ratio appears high, some of the future cashflow from the GSIHF is not expected to be collected within the investment period of the Sukuk Musyarakah. As such, RAM has not given any credit to the cashflow beyond the tenure of the Tranche i/7 Sukuk, i.e. 20 years.! Legal Issues RAM has reviewed the transaction documents for the CMBS i Sukuk Musyarakah, and is satisfied that the documents provide adequate protection for the Sukuk holders in terms of cashflow priority. In addition, cross-collateralisation of security between the existing and future indebtedness of the Issuer is not expected. These features, when combined with the restrictions on the activities of Cagamas MBS, provide comfort that the risk profile of Cagamas MBS will be reasonably detached from that of Cagamas and/or Cagamas Holdings Berhad. In the process of our rating surveillance, RAM will continue to evaluate the impact of any future debt issuance by Cagamas MBS on the Sukuk Musyarakah. The cashflow allocated in respect of the tax liability pertains only to the asset portfolio for the Musyarakah venture. Future transactions of a similar nature undertaken by Cagamas MBS will also apportion tax expenses in respect of each securitised portfolio. All administrative overheads and expenses will be borne by Cagamas, as the 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 Sukuk Musyarakah has been cancelled. The transaction reports will contain key performance indicators for the underlying asset portfolio and the Sukuk. 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 16

17 ! 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 Bin Abd Kadir Dato Huang Sin Cheng Steven Choy Kai Choon PricewaterhouseCoopers Not listed Not applicable None Capital History: Year Remarks Amount Cumulative Total (RM) (RM) 2004 Initial share capital

18 Profile of GSIHF Pool Purchased under the Trust Appendix 1 Breakdown by Occupation Breakdown by Financing Type (by No of Accounts) FEDERAL AND STATE MEMBER LOCAL COUNCIL FEDERAL BODY STATE B ODY STA TE GOVERNM ENT ARMY M INISTER M A LA YSIA N RA ILWA Y POLICE 0.1% 0.1% 2.3% 0.1% 1. 7 % 0.7% 0.0% 0.0% 5.8% Purchase of land 5% Purchase of house under const ruction 74% Ref inancing 1% Purchase of complet ed house 12% Const ruct ion of house on land previously purchased 8% TEACHER 3.0% PUBLIC SERVANTS 86.3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Principal Outstanding Breakdown by Principal Outstanding Breakdown by Monthly Instalments < RM49,999 RM50,000 - RM89,999 RM90,000 - RM149, % 34.1% 36.1% <RM399 RM400 - RM % 67.4% RM150,000 - RM189, % RM1,000 - RM1, % RM190,000 - RM249,999 RM250,000 - RM299, % 3.7% RM1,400 - RM1, % RM300,000 - RM400, % >=RM % 0% 5% 10% 15% 20% 25% 30% 35% 40% No of Accounts 0% 10% 20% 30% 40% 50% 60% 70% 80% No of Accounts Breakdown by Seasoning Breakdown by Current Age of Borrower (by No of Accounts) No of Accounts 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 5.60% 2.46% 43.76% 22.59% 1.35% 4.05% 4.59% 4.26% 11.34% < >= 25 Remaining Term-to-Maturity No of Accounts 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% < Remaining Term-to-Maturity >55 Source: BPP 18

19 RAM S CREDIT RATING DEFINITIONS (Islamic Investment Instruments) LONG-TERM RATINGS AAA AA A BBB BB B C D Islamic investment instruments rated AAA are judged to be of premier quality, with the highest safety for capital preservation and the highest likelihood of realising the expected returns in accordance with the investment contract. Islamic investment instruments rated AA are judged to be of high quality, with high safety for capital preservation and a high likelihood of realising the expected returns in accordance with the investment contract. Islamic investment instruments rated A are judged to have adequate safety for capital preservation and realisation of the expected returns in accordance with the investment contract. However, they are more susceptible to changes in circumstances and economic conditions than the Islamic investment instruments in higher-rated categories. Islamic investment instruments rated BBB are judged to have moderate safety for capital preservation and realisation of the expected returns in accordance with the investment contract. Changes in circumstances are more likely to lead to weakened capacity for capital preservation and realisation of the expected returns in accordance with the investment contract than Islamic investment instruments in higher-rated categories. Inadequate safety for capital preservation and/or realisation of the expected returns in accordance with the investment contract. Future cannot be considered well-assured. High risk with regard to capital preservation and/or realisation of the expected returns in accordance with the investment contract. Adverse business or economic conditions would lead to lack of ability on the part of the issuer to preserve capital and/or realise the expected returns in accordance with the investment contract. Very high risk with regard to capital preservation and/or realisation of the expected returns in accordance with the investment contract. Able to preserve capital and/or realise the expected returns in accordance with the investment contract only if favourable circumstances continue. Unable to preserve capital and/or meet the expected returns. SHORT-TERM RATINGS P1 P2 P3 NP Very strong safety with regard to capital preservation and realisation of the expected returns in accordance with the investment contract. Strong safety with regard to capital preservation and realisation of the expected returns in accordance with the investment contract. Adequate safety with regard to capital preservation and realisation of the expected returns in accordance with the investment contract. High investment risk. Doubtful or minimal capacity to preserve capital and/or realise the expected returns in accordance with the investment contract due to presence of strong negative factors. 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. 19

20 Published by Rating Agency Malaysia Berhad. Reproduction or transmission in any form is prohibited except by permission from RAM. Copyright 2007 by RAM Rating Agency Malaysia Berhad No. 19-G, The Boulevard Mid Valley City Lingkaran Syed Putra Kuala Lumpur Tel: (603) Fax: (603) Website: RAM 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 s credit opinions or other analytical processes. In all instances, RAM is committed to preserving the objectivity, integrity and independence of its ratings. Fee structures and ranges are summarised in fee schedules, which are communicated to clients prior to the issuance of rating opinions. RAM also receives fees for non-rating services, including but not limited to the provision of information and other services to rated companies. While RAM reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications. 20