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Mexico's BBVA Bancomer, Su Casita End Alliance Talks
email this pageprint this pageemail usAmy Guthrie - Dow Jones Newswires
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September 14, 2010

BBVA Bancomer PCU
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Mexico City - The head of Mexico's largest banking group, BBVA Bancomer, confirmed Monday that his firm has ceased discussions to form a strategic alliance with the country's largest nonbank home-finance company, Hipotecaria Su Casita SA.

Ignacio Deschamps, chief executive of BBVA Bancomer, said at a press conference that the talks ended because the two parties had different "evaluation criteria" for Su Casita's assets.

Su Casita announced Friday, in a statement to the Mexican Stock Exchange, that the two parties had ended negotiations because they couldn't reach agreement on valuation.

Alexander Monroy, an analyst with Barclays Capital, called the development disappointing. "There has been relatively little news on Su Casita's situation over the recent weeks--the last piece of news being Bancomer performing due diligence on Su Casita's portfolio. As such, we were hoping that this meant a deal was going ahead," Monroy wrote in an investment note Friday.

Nonbank lenders, known as Sofoles and Sofomes, were created in Mexico in the 1990s as lightly regulated financial institutions that by the start of the current decade were major providers of mortgage and construction loans.

However, these companies were especially hard hit by last year's recession and market volatility because of their dependence on short-term debt and mortgage bonds for funding. Unlike banks, nonbank lenders are prohibited by law from taking deposits from the public, which would otherwise be a cheap source of funding.

Former home-loan heavyweight Hipotecaria Credito y Casa SA folded last year due to soaring bad loans and difficulty in refinancing short-term debt, while Metrofinanciera SA, a major lender to builders, restructured under prepackaged bankruptcy protection after defaulting. Even more lenders would have gone bust if development bank Sociedad Hipotecaria Federal hadn't provided credit lines to the sector.

"We continue to believe that the sector the company [Su Casita] is in (Sofoles/Sofomes) is very strategic for Mexico," Monroy wrote, "as it is the only one focusing on issuing mortgages to unregistered workers, which constitute the majority of the Mexican population. While there are ongoing discussions in the Mexican congress about turning the Sofoles/Sofomes into banks, this could take a while and, in the meantime, the industry needs to keep functioning."

Su Casita's shareholders contributed fresh capital for 370 million pesos ($28.8 million) in April, following a capital increase for MXN500 million in 2009. Spanish bank Caja Madrid owns 40% of Su Casita. Caja Madrid's investment never really addressed Su Casita's need to find a source of stable, long-term funding because the Spanish bank doesn't have deposit-taking operations in Mexico.

The recession and funding constraints caused Su Casita to make just 4,375 individual mortgages for MXN1.93 billion last year, down from 20,181 mortgages for MXN7.84 billion in 2008. Total performing loans, which include those held on the balance sheet and securitized loans, fell 10.4% to MXN48.34 billion at the end of 2009. Nonperforming loans surged to nearly 11% of total loans at the end of last year, from 5.2% in 2008.

The company reported a 2009 loss of MXN147.2 million as loan-loss provisions nearly doubled. Su Casita said earlier this year that it hoped to make 7,000 to 10,000 loans for MXN3 billion to MXN4 billion in 2010.

"While we believe it possible that eventual recoveries could exceed current levels, we expect prices on the company's notes to come down to reflect its new risk paradigm. As such, we would urge caution around Su Casita's notes at current levels," Barclay's Monroy wrote.

Su Casita said Friday that it is analyzing its alternatives with the objective of informing its different creditor groups sometime in the last week of September as to what steps they should take in relation to their debt holdings.

Moody's Investors Service downgraded Su Casita's senior unsecured debt rating to Caa2 from B2, global scale local currency issuer rating to Caa2 from B2 (national scale issuer rating to from and long-term corporate family rating to Caa2 from B2 Monday while also placing the ratings on review for possible further downgrade.

Moody's said Su Casita's current liquidity position is weak, as it has sufficient funds available to cover existing debt only through the middle of the first quarter of 2011.

"Should the company not adequately address its liquidity constraints, the ratings would likely face a multiple-notch downgrade, reflecting the increased likelihood of default and the potential for above average loss severity for bondholders in the event of default," Moody's said in a note.

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