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

DBRS Limited (DBRS) has today confirmed the BBB (low) Issuer Rating and Senior Secured Notes rating of MCAP Commercial LP (MCAP or the Partnership). MCAP’s rating has been assessed using the Global Methodology for Rating Finance Companies (the Methodology) published by DBRS on October 16, 2014. The trend is Stable on all ratings.

Today’s rating action reflects DBRS’s approach under the Methodology, which considers the overall funding mix of the Partnership and the alignment of funding with the assets in the rating. Nevertheless, as always, the ratings consider the level of debt within the organizational structure and the potential for structural subordination. The assigned rating levels are not dependent on maintaining debt below particular levels at any of the individual borrowing lines.

The rating reflects MCAP’s status as Canada’s second-largest non-bank mortgage originator, with about $45 billion in assets under administration (AUA) as of Q3 2014 (August 2014). The ratings also consider MCAP’s strong asset quality profile, which benefits from a portfolio of mortgage assets in which MCAP has minimal direct credit risk. These factors are somewhat offset by the funding profile, which is reliant on wholesale sources, operating efficiency that lags peers and the monoline focus on the Canadian real estate market. Given MCAP’s sizable origination and servicing operations, DBRS views operational risk as the Partnership’s most notable risk exposure. However, DBRS sees this risk as well managed, given the Partnership’s history of operating these businesses and low instances of losses.

MCAP’s reliance on wholesale funding is considered a constraint to the rating. However, DBRS recognizes the diversity in MCAP’s funding platform, which includes various securitization vehicles and numerous institutional purchasers of mortgages. Nevertheless, MCAP could be significantly challenged to replace funding sources in the event of a market disruption.

MCAP’s earnings benefit from the recurring income generated from the servicing business and as AUA increase. MCAP retains servicing rights on all AUA. As a result, the servicing business produces stable revenues, which serve as a counterweight to the more variable revenues generated from new origination business. Indeed, 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. While MCAP’s efficiency ratio is weaker than its peers, it has been improving, and DBRS expects that MCAP will make further progress in achieving an efficiency ratio commensurate with the scale of the business.

MCAP’s capital levels are viewed as acceptable, given the relatively low levels of direct credit risk being assumed, but the Partnership could be challenged in the event of large unexpected charges related to operational or other risks.

Like other Canadian mortgage originators and servicers, the Partnership is exposed to the Canadian residential mortgage market and other real estate lending. As a result, MCAP’s profitability could come under pressure should housing sales decline, resulting in lower origination and other fee income generation. Moreover, a downturn in residential mortgage or commercial real estate markets could lead to weakening asset quality indicators and ultimately have a negative impact on MCAP’s business.

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 the 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.