TRIS Rating has assigned the preliminary rating of “AA-(sf)” to the five-year amortizing guaranteed debentures (guaranteed debentures), worth up to Bt5,000 million, issued by SPV-SMC (8) Co., Ltd. (the Issuer or the SPV). The Bt5,000 million in proceeds from the guaranteed debentures, in conjunction with the subordinated debentures (non-rated), will be used to acquire the right to receive payments from a pool of residential mortgage loans (the Assets) from the originator, the Secondary Mortgage Corporation (SMC). The size of the subordinated debentures will be around 25%-30% of the combined sum of the value of the rated guaranteed debentures and the subordinated debentures. This is the fourth rated issue of residential mortgage backed securities (RMBS) originated by SMC. The guaranteed debentures are unconditionally and irrevocably guaranteed by SMC. Currently, SMC is rated “AA-” with a “stable” outlook by TRIS Rating.
The preliminary rating reflects the creditworthiness of the guarantor, SMC. SMC is a state enterprise financial institution under the supervision of the Ministry of Finance (MOF). The rating is supported by the subordination of the subordinated debentures held by SMC. The subordinated debentures are ranked lower than the guaranteed debentures and are served as a credit enhancement for the guaranteed debentures. In addition, the rating is also supported by the liquidity facility provided by SMC and the obligation of SMC to buy back the Assets when the bonds mature. The preliminary rating addresses the full and timely payments of interest and principal on the guaranteed debentures.
The Issuer is a special purpose company established under the Thai law. Its establishment is expected to comply with the Special Purpose Vehicle Act 1997 (the SPV Act 1997). Its shareholders are SMC (49%), Good Service Co., Ltd., (48%), and individuals (3%). At the beginning of the transaction, the SPV will issue up to Bt5,000 million of amortizing guaranteed debentures and the subordinated debentures sized around 25%-30% total bond issuance. The guaranteed debentures will be sold to investors, while the subordinated debentures will be held by SMC. The proceeds from the bond issuance will be used to purchase the right to receive payments from a pool of mortgage loans, or the Assets, from SMC. The mortgage rights on the properties and any insurance policies attached with the Assets will be transferred to the SPV at the beginning of the transaction.
At the cut-off date on 31 August 2015, the portfolio comprised the mortgage loans (plus loans for decoration and loans for mortgage reducing term assurance made to some borrowers) of 2,189 borrowers that SMC purchased from Kasikorn Bank PLC (KBANK) and Siam Commercial Bank PLC (SCB), collectively called the Sellers. The remaining principal on the loans equaled Bt6,551.95 million. The book value of the Assets purchased from the Sellers was Bt6,774.29 million. Assuming no prepayment and no default, the monthly installment received from the Assets is expected to be around Bt43.35 million. The SPV commits to pay the holders of the guaranteed debentures worth Bt22.5 million per month, covering both the interest and principal components. Currently, the average interest rate across the loan pool is 4.42%. The average remaining term of the mortgage loans is 23.28 years.
Under TRIS Rating’s base case scenario, if the prepayment rate is set at 3% per annum and the default rate is set at 2.5% in the first year and increases by 10% every year (or the defaults of up to 12.3% of the portfolio value over five years), the cash inflow from the Assets will be sufficient to repay SPV’s senior obligations, including all fees and expenses. However, at the end of the transaction, SMC has to buy back the remaining loan receivables from the SPV, so that the SPV will have sufficient cash to redeem the guaranteed debentures. At the maturity date, the remaining principal of the guaranteed debentures is expected to be around Bt4,400-Bt4,500 million, or around 90% of its initial value, depending on the coupon rate of the guaranteed debentures.
SMC will also act as a servicer for the transaction. Based on SMC’s role as a servicer for its previous securitization deals, TRIS Rating believes that SMC has the capacity to service this transaction. Monthly installments received from each mortgage borrower will be deposited into SMC’s account first, and will be transferred to the SPV’s bank account at the end of each month. However, commingling risk is not a major concern since SMC will also be the liquidity provider for this transaction. According to the financial support agreement between SMC and the SPV, SMC will provide loans to the SPV to cover any liquidity shortfalls during the life of the debentures. In addition, under the Assignment Agreement, SMC has to buy back the remaining loan receivables from the SPV on the legal maturity date at a price equal to: (1) the remaining book value of the mortgage loan receivables plus any accrued interest payments, or (2) the remaining principal plus accrued interest payments on both the guaranteed and subordinated debentures and other obligations of the SPV after deducting cash in the reserve account of the SPV, whichever is lower. The proceeds from selling of the Assets back to SMC will be used to redeem the guaranteed debentures and subordinated debentures. Any further shortfall will be covered by SMC under the Guarantee Agreement.
In this transaction, around 10% of the guaranteed debentures will be amortized during the term of the debentures. The ability of the guarantor, SMC, to buy back the remaining Assets at the maturity date determines the ultimate repayment of the principal of the guaranteed debentures. In addition, any shortfalls during the life of the rated debentures will be covered by the financial support granted by SMC. Thus, in this transaction, the rating of the guaranteed debentures will change if the rating of the guarantor changes.
Up to Bt5,000 million amortizing guaranteed debentures due 2020 AA-(sf)
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