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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
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
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
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.
John J. Kriz
Financial Institutions Group
Moody's Investors Service
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
No Related Data.
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