GCR Ratings (“GCR”) has affirmed Nigeria Mortgage Refinance Company Plc’s (“NMRC” or “the company”) national scale long-term and short-term ratings of AA+(NG) and A1+(NG) respectively. Concurrently, GCR has affirmed NMRC’s Series 1, Series 2, and Series 3 Bonds national scale long-term issue ratings of AAA(NG). The rating Outlook is Stable.
The ratings of NMRC reflect its market position as the only mortgage refinance company in Nigeria with minimal risk exposures, strong capitalisation, and a robust liquidity profile.
NMRC is a private sector entity with the public purpose of developing Nigeria’s primary and secondary mortgage markets. The key mandate of the institution is to refinance the mortgage books of primary lending institutions (“PLIs”).
NMRC’s competitive position benefits from its clearly defined mandate, demonstrated track record, and the underlying socioeconomic consideration of its role. However, 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. The company’s membership base is limited to only PLIs who subscribed to NMRC’s 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.
Capital and leverage assessment is a strong ratings factor. NMRC’s capital adequacy ratio (“CAR”) 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. Similarly, GCR computed capital ratio for the company has remained at the highest level of our assessment (>35%), supported by the moderate growth in risk assets and good internal capital generation. 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 c.35%. 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.
The risk position of NMRC is sound and ratings positive. NMRC’s loan book accounted for around 25% of total assets as at end-FY21, with no credit losses or impaired loans from inception till date, evidencing the stringent underwriting criteria. Similarly, exposure to operational, market, and foreign exchange risks are considered minimal. Conversely, loan book concentrations are high due to the modest client base, with the top 3 PLIs’ loan exposures accounting for 48.6% of the total loan book as at 31st August 2022 (FY21: 56.6%). Notwithstanding that, since the PLIs spread lending across multiple individuals, we believe it somewhat moderates concentration risk.
Although NMRC is non-deposit taking, the company benefits from relatively stable long-term funding from the capital markets backed by guarantees from the Federal Government of Nigeria (“FGN”). 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. 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 (December 2020:11.4x). Positively, there are no covenants whatsoever to exacerbate liquidity risk.
The Series 1, Series 2, and Series 3 Bonds (“the Bonds” or “the Issues”) ratings reflect the strength of the Federal Government of Nigeria (“FGN” or “the Guarantor”). FGN unconditionally and irrevocably provides guarantees to the Trustees for the benefit of the Noteholders. This is provided by a way of revolving and continuing guarantee, of all its payment obligations in respect of all and any sums (including the principal and interest) due and payable by the Issuer under the Issues. In addition, all payment obligations under the Issue (except otherwise provided for by applicable laws) 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 N440bn 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.
An upward rating movement could stem from – 1) the company building on its track record and executing more on its mandate while averting the weakening of asset quality and 2) adding more quality counterparties to the mortgage portfolio 3) the company sustaining a healthy capital level while growing its loan book. Conversely, the rating could be downgraded if the company fails to execute its mandate and experienced a significant deterioration in capitalisation.
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Nigeria Mortgage Refinance Company Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Nigeria Mortgage Refinance Company Plc participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Nigeria Mortgage Refinance Company Plc and other reliable third parties to accord the credit ratings included:
Audited financial results as at 31 December 2021;
Unaudited eight-month management accounts to 31 August 2022;
Executed Trust Deed;
Trustee Performance Report as at September 2022; and
Other relevant information.