TRIS Rating has assigned a “A+” rating to the proposed issue of up to Bt1,000 million in senior debentures due within 2014 of Secondary Mortgage Corporation (SMC). At the same time, TRIS Rating has affirmed the company rating of SMC at “A+”. The outlook remains “stable”. The proceeds from the issuance of the debentures will be used to purchase housing loans. The ratings reflect enhancements from SMC’s stand-alone rating because SMC receives strong support from the government. SMC is a special financial institution (SFI) and is 100% owned by the Ministry of Finance (MOF), with a mission to promote the Thai secondary mortgage market. SMC has a competitive advantage from the special legal and regulatory support it receives, plus the tax privileges granted to SMC under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540. The composition of SMC’s board has been carefully chosen to support its mission. However, the stand-alone rating is constrained for several reasons: SMC’s short track record in performing its mission due to the unfavorable market conditions for secondary mortgages, and less competitive funding costs compared with commercial banks and other SFIs. The “stable” outlook reflects the medium-term expectation that the SMC’s management team will be able to improve operating efficiency continuously and acquire a sizable portfolio loans from its allied financial institutions as planned. The outlook also reflects the expectation that SMC’s relations with the government and related state entities, along with the business and financial support it receives from the government, remain unchanged in the future. Also, it is expected that SMC will get both direct and indirect support from the government to amend some laws, so as to stimulate demand for MBS.
SMC was incorporated in 1997, under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540, with initial capital of Bt1,000 million. Under the Act, the government can guarantee the debt issued by SMC up to a limit of four times the amount of SMC’s capital. In January 2009, the MOF injected Bt100 million of new capital into SMC. SMC’s board of directors is composed of the representatives from both the private sector and various governmental entities, including the Fiscal Policy Office, Bank of Thailand (BOT), Securities and Exchange Commission (SEC), Government Housing Bank (GHB), and Land Department, together with no more than four qualified directors plus SMC’s managing director.
SMC was established to create a secondary mortgage market and make long-term fixed rate mortgage loans available to home owners. About 80% of SMC‘s existing loan portfolio is mortgage loans acquired from financial institutions. SMC provides mortgage financing services in the primary market, then pools mortgage loans to issue mortgage-backed securities, and sell the securities to investors. However, SMC’s growth prospects have remained limited since commercial banks have not faced liquidity shortages, have strong capital bases, and prefer to retain the mortgage loans they make in their loan portfolios. Mortgage loans generate high margins and have low risk weighting compared with other types of consumer loans and commercial loans.
During 2007 and 2008, SMC revamped its business processes, reorganized its management systems, and developed its internal control systems. By the end of 2007, SMC appointed a new managing director (MD) and some key managers. Since 2009, SMC has been developing its information technology capabilities, along with its risk management and internal control systems, in order to enhance its long-term operating efficiency. According to SMC’s business plan, staff competency is another crucial element needed to enhance the quality of SMC’s loan servicing and loan monitoring capabilities. In May 2012, SMC promoted the deputy MD to be the new MD. TRIS Rating expects SMC to continue to operate smoothly, because it has continuity among the key managers.
Starting in 2009, SMC has allied with a few financial institutions to offer long-term fixed rate mortgage loans. SMC has expanded the extent of its cooperation with the existing alliances and increased the number of institutions with which it has alliances. In 2012, SMC purchased housing loans from its cooperation projects and direct purchase of housing loans from financial institutions, totalling Bt 3,256 billion. As a result, the value of SMC’s loan portfolio increased to Bt 4,756 million in 2012, jumped from 1,732 million in 2011. Due to a rise in non-performing loans or NPLs, SMC posted a loss of Bt329 million in 2007, following annual losses of Bt99 million in 2006 and Bt120 million in 2005. SMC wrote off Bt318 million in bad loans in 2007, which pushed the ratio of NPLs to total loans down from 39.79% in 2006 to 6.90% in 2007. The ratio increased to 8.94% in 2008, then jumped to 18.84% in 2011. However, the NPL level sharply declined to 5.57% in 2012 as SMC resolved some NPLs and purchased more housing loans.
In 2008, SMC reported a Bt22 million net profit after three consecutive yearly losses. SMC then reported Bt26 million in net profit in 2009. In 2010, net profit was only Bt0.3 million, due to a decline in operating income and an increase in the allowance for bad debts and doubtful accounts. The increase in the allowance was required in order to bring SMC into compliance with International Accounting Standard 39 (IAS39). In 2011, net profit recovered to Bt4.1 million, as the loan portfolio grew and the expenses for bad debt and doubtful accounts fell to only Bt5 million. In 2012, net profit jumped to Bt9.9 million after SMC bought more housing loans, earned more net interest income, and resolved some NPLs, which lowered the reserves for doubtful accounts.
A majority of SMC’s funding base is short-term promissory notes (P/Ns). Short-term P/Ns comprised 80% of SMC’s total funding in 2012. SMC’s cost of funds decreased to 3.44% in 2012, compared with 3.64% in 2011. However, SMC’s funding costs are higher than the funding costs of commercial banks which provide mortgage financing services in the primary market. Its higher funding cost puts SMC at a competitive disadvantage.
In the fourth quarter of 2012, SMC in the name of SMC-SPV (5) Co., Ltd. issued Bt660 million of the guaranteed debentures in mortgage-backed securities (MBS) as planned (MBSB15DA). The successful issuance benefits SMC in three ways. The issuance helps SMC fulfill its mission to develop the secondary mortgage market. The issuance also increases the number and type of alternative securities, such as MBS, available to investors. Lastly, the issuance reduces the current mismatch in the structure of SMC’s assets and liabilities.
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