Over Thanksgiving break, Mexico's Metrofinanciera dropped a huge turkey on the laps of its bond investors, roughly Ps4.19 billion ($308.3 million) worth. That's how much the company revealed it owed the financial trusts of its securitized debt as of the end of the third quarter.

The disclosure put a firm number on a practice that had come to the attention of market players only a couple of months ago. Homebuilders that owed the construction loans in Metro's collateralized ABS portfolios were not depositing their interest and principal payments directly in the trusts, as required by the securitization documents. They were still paying the company directly as if the assets had never been sold to trusts. Metro, in turn, would deposit the funds in the corresponding trusts.

Now it's apparent that a good deal of the money never made it.

The main rating agencies had already called attention to shoddy servicing and deteriorating asset quality in the company's deals, but the latest details still led to further downgrades of the company's construction loan transactions.

For starters, Fitch Ratings cut the senior tranches of construction loan deals to 'BBB(mex)' from 'A(mex)'.

Fitch has the long-term issuer default rating of the company at 'B+'. Prior to this round of downgrades, Fitch had said that the issuer default rating of "systematically important" nonbank housing finance companies in Mexico was unlikely to fall below 'B+' due to an effective floor set by expressed support from government agency Sociedad Hipotecaria Federal (SHF).

The de facto bottom set by the corporate doesn't extend to the junior tranches, however. Fitch dropped those to 'C(mex)' from 'BB(mex)'.

A market source said that SHF officials were on a conference call in which Metro announced the results and disclosed details of its fast-and-loose approach to servicing. The government agency is understood to be behind the management changes at Metrofinanciera since the company's troubles came to light a couple of months ago. A spokesman for the SHF did not return a call for comment as of press time.

As a government entity, the SHF's creditworthiness is generally considered on par with that of the Mexican government, which is investment grade on the global scales of all three rating agencies.

Also during the Thanksgiving holiday, Standard & Poor's downgraded construction loan deals originated by Metro.

The agency dunked nine tranches of these transactions to 'mxB+' on the national scale and kept them on CreditWatch Negative as well. It also dropped the company as a servicer of construction loans to 'Below Average' from 'Average' and as a mortgage servicer to 'Average' from 'Above Average.'

The servicer downgrade means the originator is no longer able to service portfolios if it seeks an S&P rating. The agency also cut the long-term counterparty rating of the company to 'mxB+' from 'mxBBB-'.

In a release, S&P said that the "profound discrepancies" in the information furnished by Metro as a servicer and by the trustees of the rated deals prevented the agency from basing its analysis on each discrete pool of loans. It would be able to do this only once an external audit that is underway is completed, S&P added.

The company has said that the audit will be wrapped up within the next three months.

Moody's Investors Service didn't touch any of the structured deals following the company's most recent disclosures, but the agency had downgraded nine of the originator's construction loan deals to a global scale local currency 'Caa1' when more general details of sloppy corporate governance came to light.

The agency did, however, cut Metro's issuer rating to a national scale 'Caa2.mx' from 'Ba3.mx'. The downgrade, the agency said "reflects the company's continued high exposure to short-term maturities with more than Ps1.74 billion due in early 2009." Moody's added that the company had scarce access to funding in either the domestic or international markets.

As of Sept. 20, the company reported assets of Ps25.95 billion.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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