MONTERREY, Mexico & NEW YORK - (Business Wire) Fitch Ratings has placed Metrofinanciera S.A. de C.V.'s (Metro) Issuer Default Ratings (IDRs) and credit ratings on Rating Watch Evolving as follows:
--Foreign and Local Currency Long-term IDR at 'B+';
--Foreign and Local Currency Short-term IDR at 'B';
--Support Rating at '4';
--Support Rating Floor at 'B+';
--Long-term national-scale issuer rating, including local long-term unsecured debt issues at 'BBB(mex)';
--Short-term national-scale issuer rating, including local short-term unsecured debt issues at 'F3(mex)'.
Fitch has also affirmed the following ratings:
--USD100 million 11.25% perpetual non-cumulative subordinated step-up notes at 'C/RR6';
--Individual Rating at 'F'.
The ratings are currently driven by Fitch's expectation that support will continue to be provided by the development bank Sociedad Hipotecaria Federal (SHF). In turn, Metro's Individual rating remains at 'F', which indicates that its financial condition is distressed, and that it would have defaulted absent the external support of SHF and its shareholders.
The Rating Watch Evolving reflects the current uncertainty surrounding the ongoing restructuring of Metro. Metro's issuer, support and unsecured debt ratings reflect Fitch's view that SHF support will continue to be forthcoming to Metro. Fitch has indicated in the past that such support was likely, and it has proven critical for Metro's continued operations. The company's financial condition remains undoubtedly fragile, and the process to strengthen its financial profile and restore its business prospects faces important challenges ahead, especially the need to complete a debt restructuring process amidst a difficult environment in the capital markets.
In its recent disclosure of results through Sept. 30, 2008, Metro disclosed that, in its role as collecting agent for loans which it had securitized, it had collected roughly MXP 4.2 billion of loan repayments that were improperly withheld from the securitization trusts to which they were due; these trusts contain bridge loan transactions as security. As a result, Fitch recently downgraded the ratings of the affected trusts, with the senior notes now at the same level as Metro's ratings. Given the operational deficiencies that had been highlighted in the past, and the recent disclosure of the extent of these, the ratings of the remaining trusts, which contain residential mortgage loans, were placed on Rating Watch Negative. (For further details, please see Fitch's report titled 'Fitch modifica a la baja las calificaciones de Administrador de Activos de Metrofinanciera y de algunas de sus Bursatilizaciones' dated Nov. 28, 2008 and available at www.fitchmexico.com.)
As a result of the disclosures noted above, Metro has undertaken external audits, to be concluded within 90 days, focusing on the asset quality of its loans, the valuation of the assets held in its land bank, and on the internal operating procedures related to its role as collecting agent for the trusts. The results of these audits will be critical to assess the shape and extent of the restructuring the entity will face if it is to return to a stand-alone viable entity.
As it has said consistently, Fitch continues to believe that the SHF will continue to provide the support required to avoid a default of Metro's debt obligations in the local capital markets, given its stated interest in continuing to assure their smooth functioning as a source of financing for the socially important housing sector. These obligations have been Metro's principal funding source, and total roughly MXP 4.47 billion.
Metro is also in discussions with creditors considering the possibility of restructuring certain secured and unsecured interbank facilities, totaling about MXP 4.4 billion on Sept. 30, 2008. Fitch is concerned that such restructuring could eventually take the form of a Distressed Debt Exchange (DDE) under Fitch's criteria. A DDE occurs when the terms of the restructured debt represent a material reduction vis-a-vis the original terms, or when such restructuring is coercive or de facto necessary even if technically voluntary. A material reduction in terms would arise from any among several events, such as a reduction in principal amount or in coupon/interest; significant extension of maturity dates, such as a 'stand still' arrangement with creditors; a contractual or structural reduction in seniority; among others. However, mitigating factors such as coupon increases or elevation of issue seniority could offset the potential economic loss caused by the aforementioned and prevent the restructuring process from being considered a DDE. A DDE occurs because the actions aimed at improving the issuer's financial condition are generally associated to a reduction in terms from the creditors' perspective (see Fitch's report 'Distressed Debt Exchange Criteria', published April 7, 2006 and available at www.fitchresearch.com).
When further details of the restructuring process are available, Fitch will assess the rating implications of such event. If the proposed terms of the restructuring process are deemed a DDE, Metro's IDRs would be immediately downgraded to 'C' and would later be further downgraded to 'D' (Default) or 'RD' (Restrictive Default) upon a successful debt exchange, prior to the assignment of new debt ratings to the refinanced debt obligations. Alternatively, an eventual restructuring may not necessarily be considered a DDE, and to the extent to which SHF support could play an explicit role in such restructuring, Metro's ratings could have upside potential.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Alejandro Garcia, +52 81 8399-9146, Monterrey, Mexico
Rene Ibarra, +52 81 8399-9143, Monterrey, Mexico
Peter Shaw, 212-908-0553, New York
or
Media Relations:
Tyrene Frederick-Mack, 212-908-0540, New York
Email: tyrene.frederick-mack@fitchratings.com
