DBRS Confirms MCAP Commercial LP at BBB (low), Trend Stable

DBRS Limited (DBRS) has today confirmed MCAP Commercial LP’s (MCAP or the Partnership) Issuer Rating and Senior Secured Notes, both at BBB (low) with Stable trends. Today’s rating action follows a detailed review of the Partnership’s operating performance, financial fundamentals, and future prospects.

The ratings reflect MCAP’s solid franchise, which is underpinned by its status as Canada’s second largest non-bank mortgage originator with about $46.6 billion in assets under administration (AUA) as at November 30, 2014. The Stable trend reflects the continued strength of the MCAP franchise, the Partnership’s low risk balance sheet, and the improving earnings profile. These positive rating factors are offset by the funding profile’s high reliance on wholesale funding and MCAP’s dependence on its relationships within the mortgage broker market.

The Canada Mortgage and Housing Corporation (CMHC) limits placed on the amount of mortgage backed securities it will guarantee and the notable increase in price on the guarantee stamping fee for volumes above $6 billion for individual mortgage lenders does not appear to limit MCAP’s mortgage activity to the degree it may constrain larger banks. Consequently, the Partnership believes the change is creating opportunities for MCAP which falls below the volume levels targeted by the regulation.

Positively for the ratings, DBRS notes the strength of recurring income from servicing agreements, with servicing income continuing to grow as AUA increases. Importantly, MCAP has also made favourable progress toward reaching the critical mass necessary to generate notable positive operating leverage going forward, with expenses to operating revenues ticking down favourably in 2014 relative to the prior year. Going forward, DBRS will look for further progress by the Partnership in driving efficiency levels to those more in line with peers and for these improvements to positively impact profitability. At current levels, MCAP’s leverage is moderate for the rating category, including its net debt position and its relatively strong interest coverage.

DBRS considers MCAP’s low risk balance sheet as a key factor underpinning the ratings. Historically, the performance of MCAP’s originated mortgages has been in line with or has outperformed the Canadian Bankers Association average. DBRS sees sustaining this performance as critical to MCAP’s model of securitizing and selling wholesale loans to larger financial institutions. DBRS notes that in 2014 MCAP also began providing a small portion of funding in the construction loans it originates, which adds credit risk, but provides comfort to investors that MCAP as an originator now has a stake and thus, the interests of the investor and the originator are aligned. The additional credit risk taken on is minor given the absolute dollar amount of funding tied to construction lending is minimal at roughly $3 million at fiscal year-end 2014. As a result, DBRS sees no impact to the overall credit risk profile of MCAP but will continue to monitor the Partnership’s appetite for lending in this space.

Given the restrictions on placing insured mortgages in non-CMHC funding vehicles, MCAP decided to test the market in 2014 issuing its first uninsured prime conventional residential mortgage backed security (RMBS) transaction since 2006. The uninsured RMBS transaction was successfully received by the market and MCAP will continue to explore the market appetite for uninsured RMBS transactions going forward, including the extent to which there are opportunities to expand volumes. Moreover, this uninsured product would diversify MCAP’s offerings to investors.

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 methodology is Global Methodology for Rating Finance Companies which can be found on our website under Methodologies.

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