A. Transaction Summary Issuer CapOne Berhad Issue Size (RM mil) 1,000 Sector Primary Loan Obligations Issue Date September 2005 Tenure 5 Years Legal Maturity Date September 2010 Expected Maturity Date September 2010 Orignator EON Bank Berhad Administrator n.a Portfolio Manager Amanah SSCM Asset Management Bhd Arranger Malaysian International Merchant Bankers Bhd Technical Advisor Nomura Advisory Services (M) Sdn. Bhd. Trustee Malaysian Trustees Bhd Insurer n.a B. Portfolio Characteristics Sept 2005 Sept 2006 Portfolio Exposure (RM million) 1,000 1,000 a. Super Senior Class A-1 (RM million) 600 600 b. Senior Class A-2 (RM million) 250 250 c. Mezzanine Class B (RM million) 50 50 d. Subordinated (RM million) 100 100 No. of Loans In Portfolio 25 25 Facility Tenure (years) 5 5 Composition on Unsecured (%) 100.00 100.00 Composition with Single Bullet Payment (%) 100.00 100.00 Composition on Semi-annual Interest (%) 100.00 100.00 Composition on Fixed Rate (%) 90.00 90.00 C. Portfolio Summary/ Performance As per CapOne Bhd's Portfolio Report As per MARC's Review of CapOne Bhd# No. of No. of Portfolio Liquidity OC Test*** IC Test**** Top 3 Obligors IC Test**** (%) OC Test*** OC Test*** (%) IC Test**** (%) No. of Obligors No. of No. of Portfolio As At Exposure (RM WARF* WAR** Reserve (%) (Super (%) (Senior Industries Rated (Super Senior) (%) (Senior ) (Mezzanine) (Mezzanine) Industries Rated A Upgrades Downgrades mil) (RM mil) Senior) ) Exposure BBB and and Above Below Portfolio Limit 1,000 10.00 n.a n.a 140.00 140.00 105.00 120.00 102.00 115.00 n.a n.a n.a n.a n.a n.a 20-Sep-05 1,000 n.a A- - - - - - - - 14 43.50% 16 0 n.a n.a 20-Mar-06 1,000 7.70 A- 6.59 166.67 192.4 117.65 142.74 111.11 134.36 14 43.50% n.a n.a n.a n.a 20-Sep-06 1,000 10.30 BBB+ 16.64 166.67 251.06 117.65 186.11 111.11 175.17 13 45.30% 4 4 0 10 20-Mar-07 1,000 7.80 BBB+/A- 17.35 140.00 234.69 98.82 174.31 93.33 164.56 13 45.30% 3 4 0 2 Notes * Weighted average rating factor **** Interest coverage test ** Weighted average rating n.a Not applicable # *** Overcollateralization test Annual reviews in September 2005 and October 2006 CapOne Berhad: Industry Outlook As At January 2007 1. Automotive Outlook: Negative Comments: Overall auto sales or Total Industry Volume (TIV) dropped by -11.1% to 490,768 units in 2006 against 13.3% (2005: 552,316 units) increase registered in 2005. The decline was largely attributed by sales of passengers’ car (PC), which accounted for more than two thirds of TIV. Sales of passengers cars fell by -12.0% to record 366,738 units in 2006 against 416,692 units in 2005 in spite of the lower vehicle prices that were made possible by the National Automotive Policy (NAP). Higher interest rates, stringent rules for loan approvals and shorter repayment periods and very weak used car prices were key factors behind the slump in auto sales. Higher inflationary expectations, and the hike in retail fuel prices also dampened sales. The Malaysian Automotive Association (MAA) in its recent forecast revised TIV for 2007 to 500,000 units, only 1.9% up from 2006. The downtrend in the country’s total vehicle sales continued in January 2007, with a 14.9% decline in unit terms compared with a year ago. Compared to January 2006, sales of commercial vehicles plunged 75.3%. By contrast, car sales in the non-national car segment surged 64%. Sales of national passenger cars continued to slide by 11% to 19,110 units. MARC continues to maintain its negative outlook for the automotive sector as a whole amidst sluggish auto sales, weaker consumer demand, industry overcapacity, increasing competition, shorter production runs and bloated inventories. Historically, the outlook for the auto parts segment has been tied to the fundamentals affecting the domestic automotive industry, a sector that was highly protected from import competition. Both the auto parts suppliers and auto makers are presently in the throes of restructuring and consolidation but political and social sensitivities appear to be slowing the process of restructuring. Domestic automotive and component manufacturers are adapting at different paces to the generally more competitive environment. Players with broad technical capabilities, meaningful presence in regional markets, and financial strength are responding well to continuing challenges. 2. Buildings, Materials and Real Estate Property (Outlook: Negative) Comments: Total property transactions in the first half of 2006 continued to fall by 4.1% to 131,222 units from 136,945 units recorded in the corresponding period of last year. Residential property transactions, which formed 64.5% of total transactions, fell by -3.4%. Agriculture land, commercial properties, development land and Industrial properties also declined by -6.6%, -1.0%, -6.6% and -9.8% respectively. Concerns over higher interest rates were seen as the main contributor to the weak performance, particularly in the residential segment. In addition, lending activities for the sector have moderated as banks have increasingly become more stringent with respect to their credit policies. Nevertheless, concerns over further interest rate increases have eased in view of moderating inflationary pressures. Although the property market is expected to remain soft into 2007, the outlook is more positive for landed properties in choice locations while demand for properties in secondary locations and lower-priced properties will continue to remain subdued. The cautious outlook for the sector will depend on inter alia, factors such as the availability of bank credit on attractive terms, realistic pricing by developers and consumer sentiment. 3. Construction and Engineering Overall (Outlook: Mixed) Comments: In 3Q06, the construction sector growth reduced by -0.4% yoy after contracting by - 0.5% yoy in 2Q06. The sector is likely to register positive growth of 3.5% p.a. under the 9MP. According to the latest Economic Report (2006/07), Malaysian government projected the sector would grow to +3.7% in 2007. For the period from 2006 to 2010, RM46.8 billion was allocated as development expenditure for infrastructure and utilities. This represents 23% of total allocation under the 9MP and also an increase of RM10.0 billion from the amount located for the sector under the 8MP. However, not all construction players will benefit equally from the rollout of the 9MP. The initial rollout of 880 small scale projects worth RM15 billion tendered in last quarter of 2006 specifically benefit the small construction players, which represents the vast majority of the country’s registered contractors. Out of RM46.8 billion allocation, RM30.3 billion will be for the transport sector with roads making up RM17.3 billion of the allocation. The remaining RM16.5 billion was allocated for utilities sector i.e. for water supply, sewerage, rural water and flood mitigation. Although infrastructure projects in the pipeline such as water, waste water and public transport projects hold promise for larger construction players, competition will be intense. MARC foresees that only stronger companies will be able to undertake projects under PFI programmes. Landscaping services (Outlook: Stable) Comments: The landscaping services industry continues to exhibit promising growth prospects in the country. Factors that will continue to stimulate the expansion of the industry over the longer- term include continuing Government support and emphasis on the importance of landscaping as an integral part of the development, growing awareness on the value of landscaping, including its economic, social and environmental benefits, as well as a growing trend towards outsourcing landscaping activities; especially maintenance. Various sub-segments of the industry are likely to experience differing driving factors. In the public parks and other recreation areas, city and town development/rejuvenation as well as the infrastructure facilities sub-segments, growth would primarily be driven by Government spending on infrastructure projects and its continuing support and push to green the nation. 4. Leisure and Entertainment Outlook: Stable Comments: As reported by the World Travel & Tourism Council, the Global Tourism & Travel is expected to grow 4.6% to US$6.5 trillion in 2006, representing 3.6% of total global GDP; and 10- year (2007- 2016) annualized growth forecast of 4.2% per annum which demonstrates strong long term growth outlook. However, the outlook is moderated by fears of terrorist attacked, epidemic diseases and any unexpected events that might affect the travel and tourism industry. In view of Visit Malaysia Year 2007 (VMY2007), inbound tourism is expected to generate a significant increase in international tourists arrivals which is targeted at 20.0 million. This will augur well for RPB’s Travel and Hotel Management’s division and therefore, the next two quarters are anticipated to remain bright, especially during major festivities and school holidays. 5. Metal and Mining Steel - Global (Outlook: Stable) Comments: The International Iron and Steel Institute (IISI), in its outlook on the world steel market for 2006 describes the short range outlook for world steel demand as good in 2006. IISI expects demand from China to continue to be the main source for strong growth in the industry. The forecasts confirm the trend in recent years of an increase in steel use in line with general economic growth with the fastest growth occurring in countries such as India and China. Costs of raw materials and energy will continue to represent a major challenge for the world steel industry according to the report. The continued consolidation across the steel industry in China would ideally increase the efficiency of steel plants and reform its fragmented steel industry. The general feeling is that the next few years will be relatively stable for the industry although it will continue to be cyclical but with less volatility in prices. Steel - Domestic (Stable Outlook) Comments: Domestic consumption is anticipated to improve marginally in 2006 before picking up steam from 2007 onwards, in tandem with the implementation of infrastructure development projects under the 9th Malaysia Plan (2006-2010) (9MP) and industrial activities under the 3rd Industrial Master Plan (2006-2020). The time gap between the award of projects and the mobilization of construction works under the 9MP is expected to be between six to twelve months. Overall, growth of the Malaysian steel industry for the six-year period (2005-2010) is expected to be lower but more sustainable, at 10% average annual growth, compared to the 20-30% experienced during the heydays of the industry in the mid-1990s. 6. Paper, Forest Products and Furniture Outlook: Mixed Comments: Furniture and parts (except wooden furniture), professional and scientific instruments and miscellaneous manufactured articles are categorized under other manufactured goods. For the first half of 2006, this segment expanded by 6.2%, accounting for 7.2% of total manufactured export earnings (first half 2005: 13.3%, 7.5%), with professional and scientific instruments and furniture and components being major contributors to exports in this segment. The top five importers of Malaysian furniture are the United States, Japan, Britain, Australia and the United Arab Emirates. Local furniture manufacturers are shifting their target countries from the traditional export countries such as U.S., Europe and Japan to exploring and penetrating new markets namely the Middle East and Latin America. The export market relies heavily on the U.S. market as they consume a fifth of Malaysia’s exports. Recently, the U.S. economy reported slower growth for 2Q2006 at an annual rate of 2.6%, lower than previously estimated and less than half the 5.6% pace in the first quarter. The U.S.’s business spending, consumer demand, homebuilding and housing market slowed, in line with higher energy and borrowing costs, making the Malaysian exports market vulnerable to developments there. 7. Utilities Energy (Outlook: Stable) Comments: Electricity demand and consumption bear close correlation to the performance of the economy. Going forward, the industrial and commercial sectors are expected to continue driving electricity sales. Industry players expect to benefit from continued increase electricity consumption driven by the country’s economic growth, industrialization programmes, and rising affluence. In line with the positive outlook of the national economy, peak demand of electricity is expected to grow at an average rate of 7.8% per annum to reach 20,087 MW in 2010. By end of 2010, the accumulated installed capacity is expected to increase to 25,258 MW. The outlook for the industry remains stable as the appreciating ringgit against major currencies is expected to help cushion the impact of higher oil prices, in particularly, coal purchases that are denominated in USD. Oil & Gas (Outlook: Positive) Comments: The O&G industry is expected to remain robust, backed by relatively strong crude oil prices in the short to medium term. Oil sands, Gas-to-Liquid, Liquefied Natural Gas and the minerals processing sectors of this industry are expected to see strong demand in the future. The strong oil prices will continue to spur O&G activities in both the upstream and downstream sectors. Also, without real alternatives in energy, it is expected that demand for primary energy resources to be high. This will lead to higher capital expenditure by industry players and drive demand for process equipment. Petronas has also targeted Malaysia’s output of crude oil to increase by 3% per annum during the next five years.1 Despite the anticipated slower economic growth for 2006, the local O&G supporting companies are expected to continue to experience growth in their profitability over the next few years, supported by spending on exploration & production and the continued discovery of new oil fields. According to a report by Spears and Associates Inc, international drilling activity is expected to increase by 9% in 2006. The activity is expected to be led by the Middle East with a 19% gain, followed by Europe (11%), Africa (7%), the Far East (5%) and Central and South America (2%). Total spending in these markets (excluding the US, Canada, the former Soviet Union and China) to drill and complete new wells is expected to reach US$71.3 billion in 2006, up 21% from in 2005. In addition, the recent discovery of deepwater oilfields off the coast of Sabah is expected to further 1 Business Times, 6 January 2006 boost deepwater and ultra deepwater drilling activities within Malaysia. As drilling activities increase, the global rig count is also expected to rise by at least 10% in 2006. 8. Telecommunications Outlook: Mixed Comments: The telecommunication industry is highly competitive, exemplified by the current price war among telcos for both VoIP services and prepaid mobile cards. Despite cellular growth penetration exceeding 80%, the domestic mobile market continues to grow, registering a growth of 34% in 2005 (2004: 31%) with a subscriber base of 19.5 million. The three main telcos continue to dominate the market with intense competition for market share reflected in pricing through lower prepaid starter kit prices and other discounts resulting in thinner margins. Overall, broadband penetration rate at end 2005 was 1.9% (2004: 0.98%). Of significant note is that the increase in subscriber take up has been accelerated by the reduction of broadband Internet access charges for both commercial and residential users and the more concerted efforts taken by service providers to facilitate take up and further improve quality of service. Malaysia’s internet penetration grew to 43% in 2005 whilst broadband growth was over 90%. Competition is also expected to intensify for the broadband segment as the increased urgency for the Government to speed up broadband penetration leads to the opening up of the market to new players. 9. Food, Beverage and Tobacco Herbal Products (Outlook: Stable) Comments: The World Health Organization estimates the size of the global market for herbal products at USD 80 billion in 2000 and is expected to grow to USD200 billion in year 2008 and USD50 trillion in 2050. Global consumption for medicinal herbs grew from USD17.4 billion in 1997 to USD19.7 billion in 2002 and is predicted to expand to USD21.6 billion in 2006. The global market for medicinal herbs is fragmented and consists of many market players ranging in the thousands from the multinationals and local players to cottage industries. Local Malaysian market players include medium sized companies, small enterprises and cottage-based industries. These locally manufactured products are either sold through direct selling or retail outlets. While local consumption is expected to grow further, the domestic market is limited in size and the greatest prospects lie in the export market. Prospects for the export of herbal products from Malaysia are promising considering the size of the global market, growing research and consumer interest. Following the stable growth in Malaysia’s GDP in 2005, GDP growth is expected to increase by 6% in 2006. This is despite concerns about a tougher retail environment in 2006 as Malaysians brace themselves against higher interest rates and greater inflationary pressure from lofty world oil prices which might adversely affect consumer’s demand especially on non-essentials. 10. Electronics Outlook: Stable Comments: Global chip sales in 2006 recorded an increase of 8.9% from 6.8% over the same period in line with Semiconductor Industry Association’s (SIA) forecast of 9.4% for the whole year of 2006. Malaysia’s export on electronics and electrical (E&E) product also showed commendable performance during the same period. Export on E&E, which form 47.7% of total exports, rose 6.2% in 2006 to RM281 billion; a reflection of Malaysia as one of the world’s leading sites for semiconductor assembly, testing and packaging. Despite improved performance in the most part of the year, the sector outlook remains challenging as the consumer market drives more than 50% of the worldwide sales. As such, growth of the US economy which is expected to moderate in 2007 inevitably sets the scene for 2007. The outlook for the industry remains stable for 2007 with projected growth in sales to reach 10% fuelled by the steady demand for consumer electronic products, namely, PCs and cell-phones, amongst others. MARC expects the bigger players to ride the wave in 2007 given their better bargaining power and ability to manage capacity utilization with established systems and forecasting techniques employed. The strengthening of the Riggit against the USD is not expected to pose much impact to the MNCs operations in Malaysia in the short term due to the natural hedge present with regards to the raw materials although the resultant higher labour cost may result in these companies reviewing their production cost strategies in the medium term. 11. Environmental Services Waste Management (Outlook: Stable) Comments: Generally stable industry conditions are expected over the intermediate term. Growing demand for recyclable materials and decreasing landfill capacities support moderate growth expectations. The total amount and percentage of recovered and recycled wastes (paper, scrap metal, and glass) continue to increase, albeit from a fairly low base. These positives are mitigated to some extent by aggressive capital spending plans, particularly if financed by rising leverage. The growth of the industry will depend on the ability of the players to each perform their respective roles and responsibilities. Therefore, the outlook for the industry remains stable, in so far as current consumption and economic trends prevail and the GoM continues in its push towards alternative methods of waste management. 12. Banking and Finance Consumer and Personal Finance (Outlook: Mixed) Comments: The industry’s growth potential is directly related to domestic private consumption, i.e. consumer confidence and income levels. Increased oil prices, electricity tariff and interest rates are expected to have a dampening effect on private consumption. In addition, competition is intense within the industry due to the absence of product differentiation and the difficulty in capturing and maintaining a market position. As higher living costs reduce consumers’ level of disposable income, consumers may resort to buying on credit resulting in higher disbursements of consumer financing. This in turn may lead to increases in default rates as consumers become increasingly leveraged. Currently, this is still not evident with NPL levels for personal use and credit card loans showing a decreasing trend. The commencement of several government projects in the second half of 2006 under the Ninth Malaysia Plan, a rebound in electronics and high commodity prices are expected to provide a much-needed boost to the economy. Nonetheless, the outlook remains challenging in view of underlying inflationary pressures, which continue to affect consumer spending decisions. 13. Industrial and Manufacturing Refrigeration and Ice (Outlook: Stable) Comments: The outlook for the industrial refrigeration and ice industry is expected to be favourable, on the back of continuing growth in the fisheries, food, beverage outlets and production of chilled and frozen food. In tandem with increase in imports and exports of frozen food products, there will be higher demand for Temperature Control Logistics (TCL) and warehousing spaces.