This week, Mexico's Credito Inmobiliario is likely to become the first originator to collateralize a pool of construction bridge loans since before Fitch Ratings reported on heightened risk in the sector and Moody's de Mexico put Metrofinanciera's loan securitizations on downgrade review. Both events took place the third week of April.
Reflecting the new conditions, Inmobiliario has halved the tenor from its first and only deal in the sector, a 10-year, Ps750 million ($71 million) securitization that closed in December 2006 via ING. "There aren't investors who want ten years," said Gerardo Tarrats, head of corporate finance at Inmobiliario. But he added that paper shorter than a five-year wouldn't make much economic sense. In a departure from the usual approach to marketing paper in Mexico's domestic market, lead ING and the originator first went on a non-deal roadshow to gauge the buyside's appetite and determine how the product would be tweaked to make it palatable.
Tarrats said the ratings agencies had become more demanding in terms of enhancement for each rating level, and the issuer was expecting a subordination of around 21% to achieve the triple-A it was seeking on the senior piece. Moody's Investors Service and Standard & Poor's are rating the deal.
The finance official said the originator was working with a good foundation, having issued its first bridge loan transaction with a wrap from FSA, which had required that the originator structure the deal in a conservative fashion - including implementing a facility that eliminated the risk of negative carry. Given the tarnished reputation of the wrap in Mexico, even with FSA's solid triple-A, Tarrats said the all-in cost of working with the guarantor this time around was prohibitively high.
He added that the decision of state agency Sociedad Hipotecaria Federal to step into the real estate securitization market as a backstop buyer hadn't been much help to bridge loans, since market makers were willing to go higher. There was less impetus to generate a secondary market for deals backed by construction loans than for RMBS, Tarrats said. SHF has reportedly been a source of liquidity and price stabilizer during the shaky first few months of the year in the RMBS market.
Credito Inmobiliario is expected to issue a multi-tranche deal totaling between Ps800 million and Ps1 billion this week.
In a recent report, Fitch warned that risks "within Mexico's construction bridge loan sector have increased over the past year and that this segment will continue to show signs of weakness during 2008." Steeper risk could lead to higher credit enhancement for future deals, the agency said. Fitch went on to note that while defaults and delinquencies had crept only a bit higher, there were signs of slowdown in the industry. Slower amortizations had stretched out the durations of outstanding loan maturities.
The slowed-down amortizations have already jeopardized the creditworthiness of a few bridge loan securitizations from Metrofinanciera. Moody's put on review for possible downgrade five deals from the nonbank originator. The agency said that each of the transactions had a chunk of collateral that had exhibited little or no amortization in the past twelve months.
Since the loans are typically amortized with proceeds from the sales of homes in the developments being funded, a drop in the pace of amortization could signify a pullback in sales.
A source with a working relationship with Metro said that the originator wasn't expecting to tweak its bridge loan deals. He also pointed out that a $500 million transaction issued in 2003 via local brokerage IXE paid down without difficulty last month.
While Metro may be plotting its next move on the sensitive bridge loan front, the originator recently closed its first fixed-peso RMBS in Mexico with a legal final of 31.5 years, reportedly the longest ever of its kind. The deal priced at 10.3%, wide to recent fixed-peso deals from banks but tight to comparable transactions from fellow nonbank Su Casita in January of last year - although the spread is probably a bit higher given the eased rate on the 10-year local treasury. Prior to Metro, the only originators that had ventured into securitizing fixed-peso mortgages were state originator Infonavit and Su Casita. The vast majority of outstanding RMBS are in inflation-indexed units (UDIs), mirroring the denomination of the underlying collateral.
Notwithstanding its foray into fixed-peso RMBS, Metro will continue to tap the UDI market more often, given that the 70%-to-30% ratio in the originator's portfolio between loans in UDIs and fixed pesos isn't expected to fluctuate much, the source said.
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