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23 Sep 2013
Mexico, September 23, 2013 -- Moody's de México S.A. de C.V. announced
today that although there are credit positive elements to Pendulum S.
de R.L. de C.V.'s proposed loan modification
program for BRHCGCB 03U certificates [Baa1 (sf), Global Scale,
Local Currency; Aaa.mx (sf) National Rating Scale],
there are also elements that could be negative for investors.
Credit positive elements include the experience of the servicer implementing
the modification program and the conditions for providing a loan modification,
like ensuring that the recoveries from the restructurings will be higher
than the ones from implementing a judicial process. The credit-negative
features include such as the ability to refinance current loans with a
principal discount of up to 25% in some cases, and the ability
to reschedule a loan past the legal final maturity of the transaction.
How Pendulum implements the loan modification program will determine its
final impact over the transaction.
Investors have already approved the loan modification program.
Loan modifications that could entail principal haircuts of up to 25%
should get past due loans cash-flowing again. Implementing
the loan modification program could actually improve the credit profile
of the pool given that 35% of the pool balance was more than 180
days past due as of June 2013, and given that Moody's expects
a protracted foreclosure process and sale in Mexico.
However, the loan modification program contains two features that
could pose a risk to investors. First the ability to refinance
current loans with a principal discount of up to 25%, could
significantly reduce the cash flows the transaction originally anticipated.
However, the servicer will not be able to charge a "success
fee" when it modifies current loans.
Second, the servicer might not receive a significant portion of
the rescheduled cash flows after the maturity of the Class A certificates
in 2019 if a borrower can reschedule a loan past the legal final maturity
of the transaction.
The results of the program will depend on its implementation and on the
percentage of modified loans that re-default. If this percentage
is high, losses could increase above Moody's current expectations
used to rate this transaction, which would be credit negative.
Moody's estimated the loss severity that could result from implementing
the program and compared it to the current loss severity assumptions.
In its analysis, Moody's considered the following factors:
1) a stressed re-default rate of 55%, which indicates
the percentage of loans that re-default after modification;
2) a loss severity of 85% Moody's currently assumes for the
transaction; 3) loan restructurings on delinquent loans only,
with a maximum principal forgiveness of 25% (30% in terms
of present value) of the loan's outstanding balance, which
is the maximum the servicer can provide a borrower; and 4) a success
fee the servicer collects that can reach 15% of the loan's
Based on these assumptions, the loss severity rate after modification
would be 73%, which is less than the 85% that Moody's
currently assumes for the pool. However, this analysis does
not include any modifications to current loans.
LOAN MODIFICATION PROGRAMS
Loan modifications in the program include 1) "reestructura a corto
plazo" (short-term restructuring); 2) "reestructura
a largo plazo" (long-term restructuring); 3) "venta
a terceros" (sale of rights to a third party); and 4) "pago
único" (discount with upfront payment).
Moody's has identified a number of credit-positive aspects
to the program based on information from the servicer:
• The principal haircut cannot be higher than 25% of the outstanding
balance of the loan, which limits the servicer's discretion
when negotiating the haircuts. In general, borrowers can
receive forgiveness only if they remain current on their loans for the
rest of their modified terms.
• The potential recoveries on the modified loan must be higher than
the potential recoveries from the judicial foreclosure process.
The servicer must perform a net present value analysis to satisfy this
condition for each individual loan it plans to modify, to maximize
collections from collateral.
• The servicer must negotiate modifications for each loan individually,
rather than as part of a general program. Doing so will be positive
because the servicer will be able to gain a better understanding of a
borrower's financial situation and thus better assess the causes
of default and the borrower's willingness to pay, which will
determine what type of modification it should offer.
• When granting a modification, the servicer must first obtain
from the borrower a legal agreement that permits the servicer to foreclose
more quickly, in case of re-default.
• According to the servicer, generally cannot be provided more
than one modification per borrower, unless it enhances the position
of the servicer for recovering the collateral.
• Pendulum has 14 years of experience in servicing and asset recovery.
• The maximum discounts that can be provided (20% to 25%
depending on the program) are subject to the servicer credit committee's
approval. According to the servicer, the discounts are authorized
in a stepped manner, in such a way that the higher the discount,
the higher the authority needed to approve it.
From a sector's perspective, Moody's also identifies
additional risks in the modification program:
• The current servicing fee structure might not always fully align
the interests of investors with those of the servicer. By charging
a higher fee for current loans, can exist an incentive to provide
modifications to borrowers who do not deserve them or to re-modify
a loan. This is especially a risk if, for the purposes of
calculating the servicer fee, modified loans can be considered "current"
just after being restructured, with no time having elapsed to show
steady payments. In addition, the servicer can collect a
"success fee" that goes from 5% to 15% of the
restructured loan amount. However, this success fee can only
be collected after the modified loan has been current for at least six
months (in the cases of short and long-term restructurings).
• If the servicer does not document the loan modifications properly,
the amount of time necessary to repossess the collateral could lengthen
• Even within the guidelines, the servicer has some discretion
with regards to implementing the loan modification program, such
as which key assumptions it uses to calculate the net present value of
the loss of a modified loan, when compared to the net present value
of the loss of a foreclosure process.
• A lack of transparency and inadequate reporting of loan modifications
will render it more difficult to accurately assess the full impact of
the loan modification program on the credit quality of the pool.
Moody's does not express an opinion as to whether the proposed modification
program could have other, non credit-related effects.
Moody's bases its opinion partly on how the servicer has implemented the
program in the past, and how the servicer expects to implement it
in the current deal. Further, Moody's current opinion does
not preclude the possibility of a downgrade or withdrawal of the rating
for any reason, with respect to the implementation and effectiveness
of the loan modification program and any adverse effect it might have
on the credit quality and performance of the affected transaction.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".mx"
for Mexico. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Methodology published
in October 2012 entitled "Mapping Moody's National Scale Ratings
to Global Scale Ratings".
Asst Vice President - Analyst
Structured Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Maria Ines Muller
Senior Vice President/Manager
Structured Finance Group
Moody's: Credit positives and negatives in Pendulum's loan modification program for the BRHCGCB 03U transaction
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
No Related Data.
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