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Press Release
16 Jan | Wednesday
RAM Ratings downgrades rating of Cendana Sejati’s Senior Sukuk to C1/negative
RAM Ratings has downgraded the rating of Cendana Sejati Sdn Bhd’s (the Issuer) RM360 million Senior Sukuk Murabahah MTN Programme (Senior Sukuk Programme) to C1 from BB2 while maintaining the negative outlook on the rating. The downgrade mainly reflects the greater than represented severity of asset impairment, which had gravely depleted cash inflows to the transaction. As a result, the transaction is estimated to default on its profit obligations in 2Q/3Q 2020 instead of February 2021 as previously anticipated. The negative outlook continues to indicate the high likelihood of further multi-notch downgrades as the Senior Sukuk approaches an expected non-payment event in 2020. 
The rating of the Senior Sukuk Programme was downgraded to BB2 and its outlook revised to negative on 7 December 2017 to reflect our concerns about the considerable liquidity risk and severely eroded collateral buffer of the transaction. These concerns arose following stricter enforcement of the maximum monthly salary deduction cap of 60% (or up to 80% for holders of existing government staff housing loans) by the Accountant General’s Department, which had resulted in the restructuring of more than 90% of the underlying receivables, leading to significantly reduced monthly instalments and substantially extended tenures for the portfolio. At the time, Masraf Al Barakah Sdn Bhd (Originator and Servicer of the transaction) had indicated that more than 90% of accounts in the underlying portfolio faced a 60% shortfall in scheduled monthly instalments. Following the completion of a reconciliation exercise, Masraf confirmed that monthly collections had, in fact, reduced to just 4% of scheduled instalments as the residual balances of 95% of the accounts were insufficient to service their obligations.
Subsequent to the abovesaid events, monthly collections for the securitised portfolio have declined to an average of RM39,289 from the original scheduled monthly instalment of RM1.1 million. Based on the current repayment rate, the extension of the receivables’ financing tenure leaves the Senior Sukuk Programme highly exposed to a significant asset-liability mismatch, aggravating the liquidity risk already present in the transaction. We note that CoShare Holdings Berhad’s (Collection Agent for the transaction) discussions with relevant regulatory parties to resolve the shortfall in monthly deductions had not yielded any positive outcome for Masraf, although it continues to perform salary deduction services for its business partners uninterrupted (save for a two-month payment disruption in April and May 2017).  
Although Masraf had previously treated the receivables as restructured, it has decided against doing so and has said it would recognise the impairment in FY 2018. While the affected receivables remain legally in default, Masraf will continue to pursue collections via collection agents and initiate action to increase permitted salary deductions when the borrower receives a pay increment. Over-the-counter payments or early settlements for delinquent receivables have been minimal to date. Meanwhile, Masraf’s earlier intention to support the continued performance of the transaction via origination and injection of short-tenured receivables has yet to gain meaningful traction given its limited funding capacity. We highlight that information from Masraf as the appointed Servicer under the transaction has not been as timely as preferred.
We understand that Masraf is in informal discussions with the Senior Sukuk holders on another restructuring plan to address the deficit in the transaction’s cash flows. Details, however, remain fluid at present. We will continue to monitor these developments to assess their impact on the transaction and make the necessary rating announcement, if any, when more information becomes available.
Analytical contact
Lim Chern Yit
(603) 7628 1035
Media contact
Padthma Subbiah
(603) 7628 1162
Date of release: 16 January 2019
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
Ó Copyright 2019 by RAM Rating Services Berhad
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