DBRS Assigns BBB (low) Rating to MCAP Commercial LP

DBRS has today assigned an Issuer Rating of BBB (low) to MCAP Commercial LP (MCAP or the Partnership) and has released a report that provides further details on the rating. Additionally, DBRS has assigned MCAP a provisional rating of BBB (low) for $150 million of Senior Secured Notes which the Partnership may issue. The trend is Stable on all ratings.

The Issuer Rating is generally the rating assigned to securities which rank pari passu with an issuer’s most senior obligations. Provided subsidiary operating lines remain at a minimal size, DBRS views the most senior obligations to be those ranking equal to the secured bank lines and senior secured notes of the MCAP Commercial LP. DBRS does not view various mortgage warehouse facilities and securitizations as debt for the purposes of determining this ranking.

DBRS notes the strength of increasing recurring income from servicing agreements as assets under administration increases (AUA), and the favourable progress MCAP has made towards reaching the critical mass necessary to generate notable positive operating leverage going forward.

The rating reflects MCAP’s status as Canada’s second largest non-bank mortgage originator with about $41 billion in AUA as of Q4 2013 (November 2013). MCAP has a strong asset quality profile, with all mortgage assets secured by real estate, a substantial portion of which is insured, with minimal direct credit risk retained on any uninsured assets (except temporarily while waiting to insure mortgages which have already been confirmed as insurable). The Partnership is not directly exposed to credit risk on the majority of its AUA given the majority of the assets are sold outright to institutional investors. The mortgages that are not sold outright to third-party investors are almost entirely insured.

MCAP originates uninsured mortgages only when an institutional buyer or securitization is pre-arranged or it intends to insure the mortgage. The Partnership faces some direct credit risk after origination but before portfolio insuring the mortgages, but this risk is minimal because MCAP only originates conventional mortgages which meet mortgage insurer guidelines.

MCAP has retained risk in the interest only strips held on securitized mortgages and the overcollateralization cash margin provided to support these securitizations. DBRS views the risks as manageable and minimal given real estate is secured and the largely insured nature of the underlying assets. Additionally, at times there may be a few million dollars in uninsured loans such as bridge loans, expected to be re-advanced as mortgages within a few days.

MCAP is not a regulated financial institution like most of its competitors and therefore does not have access to funding through deposits. This has contributed to some material funding concentration risk within its institutional investor funding sources. MCAP continues to work towards diversifying all funding sources.

The business model provides stable underlying cash flows over the life of each loan from the servicing business (the MCAP group retains servicing rights on all AUA) and more variable revenues generated from new origination business. Originations have the potential to fluctuate with market conditions but the major costs of origination – broker commissions – are variable, resulting in less earnings volatility than would otherwise be the case. Efficiency is critical in the originating and servicing businesses and while MCAP’s efficiency ratio is weaker than its peers, the partnership appears to have just recently reached a critical mass whereby new volumes should generate a notable positive operational margin.

DBRS incorporates the bank-like and non-bank aspects of MCAP in its rating evaluation. The Partnership is engaged in lending which needs to be funded, making it bank-like. DBRS also considers the somewhat unique non-bank aspects of MCAP such as the lack of regulation and the absence of industry comparators such as standardized regulatory capital ratios. Consequently, additional measures such as certain debt leverage and coverage ratios, not always considered for banks, are used in the analysis.

Notes:
All figures are in Canadian Dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations and Criteria: Support Assessment for Banks and Banking Organizations which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.