Morningstar DBRS Confirms MCAP Commercial LP's Long-Term Issuer Rating at BBB, Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Long-Term Issuer Rating of MCAP Commercial LP (MCAP or the Partnership) at BBB and the credit ratings on its Senior Secured Notes and Senior Unsecured Notes at BBB and BBB (low), respectively. All trends are Stable. MCAP has an Intrinsic Assessment (IA) of BBB and a Support Assessment of SA3, which reflects no expectation of timely external support. This results in MCAP's Long-Term Issuer Rating being equalized with its IA.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect MCAP's franchise as one of the largest nonbank mortgage finance companies in Canada with $153.5 billion of assets under management (AUM) as of Q1 2025 and its top-tier market share position in the independent mortgage broker channel. Further, MCAP's good levels of recurring earnings and underlying cash flows from its growing mortgage servicing operations and sound level of renewals underpin its credit profile. The Stable trends also reflect Morningstar DBRS' expectations that MCAP's scale and good franchise will continue to support the Partnership's resilient performance through heightened economic uncertainty, particularly as it relates to U.S. trade policy and tariffs, which could result in a sustained decline in economic activity and prolonged high unemployment in Canada. Morningstar DBRS expects this performance to continue, despite the subdued Canadian housing market, which has resulted in lower new residential origination activity in recent quarters.

The credit ratings are constrained by MCAP's lack of business diversification and reliance on secured funding sources, which predominantly comprise securitizations. In addition, although mortgages originated by the Partnership are performing better than or in line with those originated by large Canadian banks, Morningstar DBRS views MCAP as susceptible to any adverse changes in the Canadian real estate market, as single-family mortgages comprise the majority of the Partnership's AUM.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the credit ratings if the Partnership were to continue diversifying its revenue sources from the single-family business, leading to further improvement in financial performance while maintaining good credit performance and balance sheet fundamentals.

Conversely, a prolonged deterioration in earnings or any changes in government-backed securitization programs that could constrain MCAP's ability to fund mortgage originations would lead to a credit ratings downgrade. Morningstar DBRS would also downgrade the credit ratings if the Partnership were to incur a sustained deterioration in asset quality, which could reduce investor appetite for MCAP-originated mortgages.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Good
MCAP's franchise is underpinned by a national, multibrand, and multichannel mortgage origination platform, which Morningstar DBRS views as having a broad and deep product set. The Partnership offers single-family residential mortgages (about 84% of AUM as at Q1 2025), predominantly originated through the independent mortgage broker channel, as well as multifamily residential and commercial mortgages, including construction loans (about 16% of AUM as at Q1 2025). MCAP maintains a top-tier market share in the mortgage broker channel. In a still-high interest rate environment, the Partnership's AUM was resilient, decreasing less than 1% year over year (YOY) to approximately $153.5 billion as at Q1 2025. The modest reduction was driven by a 3% YOY decrease in single-family residential AUM, primarily because of run-offs exceeding new originations of MCAP loans, partially offset by an approximate 14% YOY increase in commercial and construction AUM, driven largely by higher originations in the multifamily market. In F2024 (ended November 30, 2024), total new mortgage originations and purchases increased to $22.7 billion from $20.5 billion in the prior fiscal year, supported by higher originations in both single-family mortgages and commercial mortgages and construction loans.

Earnings Building Block Assessment: Good
Reflecting its economies of scale, MCAP generates good levels of recurring earnings supported by fee revenue produced from the retained servicing rights on all AUM. Overall, noninterest income accounted for about 53% of total revenue in F2024. In a challenging operating environment, MCAP recorded net income of $208.8 million in F2024, compared with $160.1 million in the prior year. The 30.4% increase in net earnings was driven by higher revenue, partially offset by an increase in interest expense and operating costs. Net interest income on securitized mortgages increased 26.2% YOY primarily from higher spreads between MCAP's prime lending rate and short-term CORRA-based funding costs and a higher portfolio of securitized mortgages. Noninterest income grew 2.2% YOY on the back of an increase in servicing and administrative income, origination fees, and investment income. Partially offsetting higher revenue, operating expenses increased 2.3% YOY driven largely by securitization expense, while a 20% YOY increase in interest expense was a result of higher average usage of warehousing, repo, and operating line facilities.

Risk Building Block Assessment: Good
MCAP has limited direct exposure to credit risk as the vast majority of its originated mortgages are securitized or sold to financial institutions with limited recourse. Any credit risk stems from the short time that mortgages are warehoused by the Partnership on its balance sheet waiting to be securitized or sold, as well as from the modest co-investments in development finance loans. Overall, supported by strong underwriting and adjudication processes, MCAP-originated mortgages have historically performed well with credit performance that is better than, or in line with, the industry peers. Sustaining a strong credit performance is critical to MCAP's business model of securitizing originated mortgages and conducting whole-loan sales to larger financial institutions. As a result, like other mortgage originators, the Partnership would face potential exposure to repurchase risk if there were to be a breach of representations and warranties made to the purchaser or mortgage insurer. Morningstar DBRS views this risk as well managed.

Funding and Liquidity Building Block Assessment: Moderate
MCAP's liquidity and funding are considered appropriately managed and well aligned with its assets. However, the Partnership remains predominantly funded through government and bank-sponsored securitization programs, which Morningstar DBRS views as a credit ratings constraint. As part of the strategy to diversify its funding, MCAP continues to broaden its institutional investor base with its securitization programs as well as senior unsecured notes issuance. To manage liquidity, the Partnership has established sufficient bank credit facilities.

Capitalization Building Block Assessment: Moderate
MCAP's capital is adequate, as the Partnership has limited exposure to credit risk, and capital predominantly consists of partners' equity and retained earnings. Supported by higher retained earnings and lower intangible assets, tangible partners' equity increased to $522.2 million in F2024 from $446.1 million in the prior year. As a result, tangible partners' equity increased to 6.0% of tangible assets, excluding securitizations, in F2024 compared with 3.4% in F2023. The Partner distributions payout ratio (calculated as a percentage of net income under IFRS) stood at about 65% in F2024 in line with the longer-term objective of maintaining the payout ratio at 65%. Morningstar DBRS would consider this retention level as sufficient to support growth.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024) https://dbrs.morningstar.com/research/443208. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at https://dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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