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Rating Action:

MOODY'S ASSIGNS A3.mx NATIONAL SCALE ISSUER RATING TO HIPOTECARIA NACIONAL

14 Aug 2003
MOODY'S ASSIGNS A3.mx NATIONAL SCALE ISSUER RATING TO HIPOTECARIA NACIONAL

Mexico City, August 14, 2003 -- Moody's de Mexico has assigned an A3.mx national scale issuer rating, and a Ba3 global scale local currency issuer rating, to Hipotecaria Nacional, S.A. de C.V. (HN). This is the first time Moody's has rated HN, a Sofol (Sociedad Financiera de Objeto Limitado), a special-purpose financial company. Sofols' main function is to extend mortgages to low-income individuals under the auspices of Sociedad Hipotecaria Federal (SHF) (previously FOVI) financing programs, and to provide construction financing to developers of low-income housing. SHF is one of Mexico's most important government-sponsored programs for low and middle-income housing. The rating outlook for HN is stable.

According to Moody's, these ratings reflect HN's leading market position and good financial profile, such as low operating costs, sound profitability and experienced management. The company is the leader in market share, based on total assets, among the mortgage Sofols, holding 28% of the market. These ratings also reflects the company's prudent operating and growth strategies that have enabled it to have a solid growth rate for its portfolio, while at the same time maintaining the quality of its portfolio and having one of the highest operating margins among its peers. Furthermore, HN's sound reserving policies provide it with good earnings quality. Although there is competition in the market, HN has a commanding market share and a strong infrastructure to maintain it. It also has good relationships in the housing industry, particularly with developers that solidify its position. In addition, HN has the lowest percentage of delinquent loans in the industry. Nevertheless, like all mortgage Sofols, HN relies on SHF and developers for its business. HN receives all of its funding for the origination of mortgages from SHF.

Despite these dependencies, there is a substantial market for low-income housing in Mexico, which in Moody's opinion should maintain HN's core business for the medium term. Furthermore, the major Sofols have established good business relationships with Mexico's main low-income housing developers. These relationships provide them with a pipeline of projects for financing construction and originating mortgages.

Moody's also notes that, HN has been the leader among the mortgage Sofols in accessing the capital markets. The company was the first to raise capital through securitizations, commercial paper and unsecured bond markets. HN is also optimizing its technology and processes in order to become more efficient at originating mortgages. The firm's business strategy is based on its single-family mortgage portfolio, and strives not to depend on construction bridge financing, which Moody's views as a more risky and less predictable business. Nonetheless, HN has a growing construction loan business that we expect to see continue to grow. Furthermore, HN has implemented a diversification strategy that should reduce its reliance on SHF funding and increase its income from new businesses apart from social income housing. The company's diversification strategy revolves around providing complementary products and services to its traditional housing business -- a potential credit positive, if well executed. The company also seeks to reduce its SHF funding dependency by obtaining third-party funding in the form of credit lines and strategic alliances, diversifying its short- and long-term debt access, and getting additional capital sources by securitizing its loan portfolio. HN is also looking at increasing its participation in the middle- and upper-income housing; funding home improvements; financing commercial infrastructure for housing developers and creating an outplacement service firm. Such diversification could be a challenge to manage.

These positive rating characteristics are attenuated by several factors. HN is still a small company with a modest asset valuation and equity capital base. Although, HN is one of the oldest Sofols, it has only been operating for nine years and has not as of yet faced an economic and or political crisis. HN has a heavy dependence on SHF as most of its funding for mortgages comes from SHF. Moody's views the lack of diverse funding options as a risk for Sofols. However, SHF's government status, and the importance of housing policy in Mexico, supports its viability, and Sofols' funding access. Sofols' mortgage origination business, their main revenue-producing service, is subject to the volatility in SHF's funding procedures, inherent business cycle vulnerabilities, and the commoditization and consolidation of the mortgage industry -- factors that Moody's views as credit negatives. Nonetheless, HN's recurring revenues more than cover all of its operating expenses, therefore, attenuating these credit concerns. HN has already started mitigating its funding dependence from SHF. In addition, the company has successfully placed two structured debt issues and two medium-term bond issues. Other credit concerns include a monoline business with dependency on home financing which comprises almost 100% of all loans, weak fixed charge coverage at 1.3X (however it is one of the highest in the industry) and debt to assets at a high 92%.

Nonetheless, Moody's maintains that HN has a good corporate infrastructure, which includes separation of duties across the different business functions, as well as predetermined and independent procedures for the origination and servicing of loans. The firm has created separate auditing, risk/credit, origination and servicing committees to monitor the firm's day-to-day operations, all of which help the company mitigate risk. These factors have allowed the company to maintain its total portfolio delinquencies at 1.2% at June 30, 2003, and maintain operating margins that are better than the market average.

The stable rating outlook is based on Moody's expectation that HN's management will continue to grow the company prudently, and diversify successfully and in a measured pace, while maintaining its healthy operating margins, and maintaining or improving its delinquent portfolio. Moody's believes that the Sofol's management team possesses a significant knowledge of the housing industry, and has a well thought out operating strategy. Moody's expects that HN will continue strive to boost its efficiency.

Rating improvements will reflect success in soundly diversifying its funding sources, while maintaining its profitability and portfolio quality. Additional steps supporting a positive ratings change would include enhancing its market position and brand name in the mortgage and housing financing market, while increasing product diversification. Lack of improvement in portfolio diversification efforts and access to capital sources independent from SHF would be negative rating factors. A sustained deterioration in asset quality or liquidity would place downward pressure on HN's rating.

Hipotecaria Nacional, based in Mexico City, started operations in 1994 as a non-bank financial institution/Sofol Mortgage Company. HN's main activity consists of extending mortgages financed by monies from SHF to low income individuals -- an important role in the low-income housing market, as there is no rental market in Mexico. As of June 30, 2003, the company had assets of approximately $22 billion Mexican pesos and $1.3 billion Mexican pesos in equity.

New York
John J. Kriz
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Philip Kibel
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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