GCR Affirms Nigeria Mortgage Refinance Company Ratings, Outlook Stable
GCR Ratings has affirmed Nigeria Mortgage Refinance Company (NMRC) Plc.’s national scale long-term and short-term ratings of AA+ (NG) and A1+(NG) respectively, the company said in a statement.
Concurrently, the rating firm also affirmed the private sector mortgage companies’ Series 1, Series 2, and Series 3 Bonds national scale long-term issue ratings of AAA (NG) with the outlook accorded as stable.
In the rating note, GCR noted that NMRC rating reflects the company’s market position as the only mortgage refinance company in Nigeria with minimal risk exposures, strong capitalisation, and a robust liquidity profile.
Though NMRC is a private sector entity, it has a public purpose of developing Nigeria’s primary and secondary mortgage markets with a mandate to refinance the mortgage books of primary lending institutions.
The rating note stated that NMRC’s competitive position benefits from its clearly defined mandate, demonstrated track record, and the underlying socioeconomic consideration of its role.
However, GCR said these positives are partly offset by the monoline nature of the company’s operations and modest client base – consisting of 16 primary lenders as of August 31, 2022- as well as its evolving social impact measurement and reporting.
It also noted that NMRC membership base is limited to only primary lending institutions that subscribed to its equity.
However, the Central Bank of Nigeria has recently allowed the company to extend its services outside its membership base, which could help improve market penetration and portfolio expansion moving forward, GCR noted, adding that NMRC’s capital and leverage assessment is a strong rating factor.
The rating note said the mortgage refinance company’s capital adequacy ratio sits well above the 10% regulatory minimum, registering at over 50% through the review period, which provides strong legroom for risk asset growth and loss absorption.
GCR noted that its own computed capital ratio for the company has remained at the highest level of its assessment at above 35%, supported by the moderate growth in risk assets and good internal capital generation.
It said NMRC’s earnings are solid, supported by earnings from sovereign bonds accounting for about 70% of interest income while mortgage refinanced loans accounted for 26%. The company’s costs are also well controlled, with a cost-to-income ratio of about 35%, according to the rating note.
“Moving forward, we expect the projected expansion in the refinancing portfolio to gradually moderate NMRC’s capitalisation ratios, albeit with minimal likelihood of sharp capital erosion given the strong buffers and minimal risk exposures”.
Also, GCR stated that NMRC’s loan book accounted for around 25% of total assets at the end of 2021, with no credit losses or impaired loans from inception till date, evidencing the stringent underwriting criteria.
Similarly, it noted that exposure to operational, market and foreign exchange risks is considered minimal.
Conversely, GCR said loan book concentrations are high due to the modest client base, with the top 3 primary lending institutions ’ loan exposures accounting for 48.6% of the total loan book as of 31st August 2022 from 56.6% in 2021 – a level seen as somewhat moderates concentration risk.
While noting that NMRC is non-deposit taking, GCR said the company benefits from relatively stable long-term funding from the capital markets backed by guarantees from the Federal Government of Nigeria.
As of December 2021, FGN-guaranteed bonds accounted for approximately 33% of the funding base, while direct borrowings from the FGN with a maturity of 40 years constituted 49% of the funding base, GCR said in the rating note.
The company’s balance sheet is highly liquid, with GCR liquid assets coverage of short-term wholesale funding registering at a strong 9.6x as of December 2021 from 11.4x in the comparable period in 2020.
Positively, there are no covenants whatsoever to exacerbate liquidity risk, the rating note stated. GCR said the Series 1, Series 2, and Series 3 Bonds ratings reflect the strength of the Federal Government of Nigeria.
FGN unconditionally and irrevocably provides guarantees to the Trustees for the benefit of the Noteholders; provided by a way of revolving and continuing guarantee, of all its payment obligations in respect of all and any sums due and payable by the Issuer under the Issues.
In addition, it said all payment obligations under the Issue rank at least equal to all other present or future secured or unsubordinated payment obligations of both the Issuer and the Guarantor.
The Bonds were issued under NMRC’s N440 billion Medium Term Notes Programme, as amended, backed by a resolution of NMRC’s Board of Directors which authorises the Issuer to issue the Notes/Bonds in series, different forms, and under different terms and conditions as may be deemed fit by management.
The Series 1 Bonds, Series 2 Bonds, and Series 3 Bonds were issued in November 2015, May 2018, and October 2020 respectively. The coupon rates for the Bonds are 14.9%, 13.8%, and 7.2% respectively, with maturities being 15 years each for the Series 1 and Series 2 Bonds, and 7 years for the Series 3 Bonds.
According to the latest Trustees’ reports on the Bonds, the Issuer has been fulfilling its obligations under the Issues on a timely basis, with no recourse to the FGN guarantee so far.
Thus, the Bonds bear the same default risk as the Guarantor.
The stable outlook reflects GCR’s expectation that NMRC’s capitalisation will remain strong, with moderate growth in lending while maintaining a low-risk profile in the next 12-18months.
“We also expect additional bond issuances to augment the funding base, improve earnings and enhance mortgage refinancing”, the rating firm added. # GCR Affirms Nigeria Mortgage Refinance Company Ratings, Outlook Stable